The Pound found some support below $1.4500 against the Dollar, rebounding from its lowest level in three weeks, while the UK currency also rallied back towards 1.1300 versus the Euro. UK stocks continued to slide, led by declines in banking shares, but quarterly results from Tesco Plc and Burberry Group Plc increased speculation that the economic slump may be easing.
The benchmark FTSE 100 Index lost just 0.1% to 3,987.46 in London, after earlier falling as much as 2.4%, following reports that earnings from Bank of New York Mellon Corp sparked a sell off in banks, offsetting a rally in consumer-related companies. Shares in Barclays Plc and Lloyds Banking Group Plc both retreated after the report.
The FTSE 100 has gained 14% from its lowest point this year, amid increasing optimism that the worst of the recession may be over. Almost $1.3 trillion in banking losses worldwide since the start of 2007 has dragged the UK benchmark index down 48%.
The correlation between the performance of the Pound and the volatility in equity markets has become increasingly prevalent over the past year. Since hitting a high of $1.5068 against the Dollar last week, the Pound has fallen to a low of $1.4472, as a degree of risk aversion crept back in to the market and encouraged investors to seek the security of U.S denominated assets.
The Pound swung between gains and losses against the Euro yesterday, after a report from the Office of National Statistics showed that UK consumer price inflation dropped to the lowest level in a year. The worst recession in a generation has blunted price pressures across the economy, as consumer prices rose just 2.9% from a year earlier
The result matched the median forecast but the retail price index annual gauge dropped for the first time since 1960. Energy costs have plummeted and retailers have reported slower sales, as Tesco Plc, Europe’s second largest retailer, said yesterday that profit growth was the slowest in 15-years. Price cutting by rival companies has eroded their market share, as consumers cut back on spending, amid fears over job security.
George Buckley, chief UK economist at Deutsche Bank AG in London, said yesterday that “we are going to get below 1% inflation by September”, which may undermine confidence in the economy in the second half of the year and stoke deflationary concerns. The Bank of England forecasts that inflation will slow to 0.3% by 2011, well below the government’s 2% target, and a recent report showed that UK producer prices rose at the slowest annual pace in March for almost two years.
The Governor of the Bank of England Mervyn King wrote a letter of explanation to the Chancellor, as to why inflation had breached the 3% upper limit in February and said that a “sharp decline” in the rate is likely to resume. Although it may remain “volatile” because of the weakness in Sterling, which makes imports more expensive.
The retail price index measure of the report showed a 0.4% annual price drop in March to record the first annual decline in nearly half a century. The Bank of England have cut interest rates to a record low of 0.5% and embarked on a policy of quantitative easing, through the purchase of government bonds with newly created money.
The Confederation of British Industry predicted earlier this week that the UK economy will contract 3.9% this year, curbing tax revenue and pushing the budget deficit to 11.2% of gross domestic product. The Chancellor Alistair Darling will deliver his budget statement at midday today and is expected to refrain from announcing any additional fiscal stimulus measures.
Darling is expected to spell out plans to rein in the UK fiscal deficit, outlining measures to improve government efficiency and slow government spending. The cost-cutting will form part of a broader effort to rebuild credibility in the handling of the economy and boost Labour support in the polls.
The budget will also offer short-term relief to the unemployed and provide incentives to spur new industries. The government is seeking to fend off criticism of economic mismanagement from economists and opposition leaders, after injecting hundreds of billions of Pounds to shore up the banking sector.
The budget deficit will be £160 billion in the fiscal year ending in March 2010 and a projected £167,000 billion the following year, according to a median of estimates carried out by the Treasury. That’s significantly higher than the £118 billion that Darling predicted in December and economists have urged the Chancellor to hold back on any new fiscal support, giving more time for previous measures to work.
In terms of economic data, the Pound may come under further selling pressure this morning, as UK unemployment data may show that jobless benefits claims jumped to the highest level since 1997. Claims probably increased to 116,000 in March, while the Pound may also be susceptible to the tone of the minutes from the Bank of England’s last policy meeting.
There were mixed comments from MPC member Fisher yesterday, who indicated that policy makers would need to discuss whether the quantitative easing program would need to be expanded. Any move to increase the rate of bond purchases would tend to undermine Sterling.
The Euro found some support below $1.2900 against the Dollar on Tuesday and attempted a rally during the day. German investor confidence rose to the highest level in almost two years in April, after global stocks rallied on government and Central Bank efforts to revive economic growth. The ZEW Centre for European Economic Research said that its index of investor and analyst expectations rose to the highest level since June 2007 and recorded the first positive reading since July of that year.
European stocks last week posted their sixth consecutive weekly advance, amid speculation that the worst of the recession may be over. The German Chancellor Angela Merkel’s coalition government will spend about €80 billion to the stem the country’s worst recession in over sixty years and the ECB has signaled that it will cut interest rates to a new record low in May.
The Dollar declined against almost all of the 16-most actively traded currencies yesterday, after the Treasury Secretary Timothy Geithner said that the “vast majority” of U.S banks have sufficient capital. His comments reduced the allure of the Dollar as a safe haven and the U.S currency declined more than 1% against the higher-yielding currencies.
Data Released 22nd April
U.K 09:30 BoE Minutes of 8/9th Meeting
U.K 09:30 Average Earnings (3 Mths to February)
U.K 09:30 Claimant Count Unemployment (March)
U.K 09:30 PSNCR (March)
written by Adam Solomon
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