Article Courtesy of: TORfx
Following on from last week, the Pound was unable to sustain a recovery against the Dollar on Friday, dropping to a one-week low of $1.4270 in New York, after a government report showed that the UK economy sank deeper into a recession in the fourth quarter of last year.
The Pound was still firmer against the Euro, peaking close to the resistance level at 1.0810, before consolidating near 1.0750 at the close of trading on Friday, despite the report from the Office of National Statistics, which showed that UK gross domestic product fell 1.6% from the third quarter.
The UK economy’s contraction in the final three months of last year was far deeper than previously anticipated, as consumer spending stalled and industrial production plunged by the most since 1980. According to Philip Shaw, chief economist at Investec Securities in London, said that the “headline figure is very disappointing…we see the economy shrinking until the middle of the year. It’s very difficult to see it gaining any momentum of recovery until the third quarter at the earliest.”
The Pound came under further selling pressure against the majority of the 16-most actively trading currencies, after the Bank of England’s chief economist Spencer Dale said on Friday that the British economy’s short-term prospects are “bleak”.
Consumer spending has declined 1% and retail sales also stalled, after bank’s kept lending conditions retrained, despite the most aggressive policy easing in the Bank of England’s history. Policy makers, led by the governor Mervyn King, have slashed borrowing costs from 4.5% in October to a record low of 0.5%. The Bank have also begun a period of quantitative easing through the purchase of government and corporate bonds with newly created money.
Bank’s are still reluctant to revive lending and spending on the highstreet and on homes has plummeted, as the worst financial crisis since the Great Depression wiped out £1.9 trillion off consumers’ wealth. The Pound fell 0.6% against the Dollar after the release of the data, which confirmed that the UK economy is in the midst of the worst economic contraction since 1980, when Margaret Thatcher was Prime Minister.
The UK economy shrank 2% in the fourth quarter, compared to the preliminary estimates of 1.9%, as the drop in construction was more than four times as much as initial forecasts. In addition, government spending rose less than expected at 1.3% and retail sales posted the smallest annual gain in over 13-years last month.
The 1.9% drop in sales was exacerbated with the alarming increase in unemployment, as the jobless rate rose at the fastest pace since 1971 in February. Companies were forced to slash jobs in an attempt to reduce costs, while HSBC Holdings Plc, Europe’s biggest bank by market value, said last week that about 1,200 UK employees may lose their jobs.
The Prime Minister Gordon Brown, who has seen his popularity fade in the face of rising unemployment, said agreements that the government signed with the Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc require the banks to boost lending to help the economy recover.
Over the past week, Brown has embarked on a five-day diplomatic tour to try and raise interest in a combined attempt to boost global growth. He told journalists on Friday that “bank’s are now under an obligation to lend £50 billion. So the position that we were last year where the naming system had frozen, we are now seeing the results.”
Brown also quelled suggestions that he was planning a big new fiscal stimulus package, saying that measures in the UK’s annual budget next month will be “cautious” and “targeted”. The tone of the statement mirrored recent comments from the Chancellor of the Exchequer Alistair Darling, who said that the Treasury must keep its deficit under control, after the government bond auction failed for the first time since 2002.
The Pound also declined on Friday, after a separate report showed that the UK current account deficit was wider than previously anticipated in the fourth quarter. A current account gap represent money the UK has to borrow overseas to pay for the goods and service that it import. The shortfall narrowed to £7.6 billion, from a revised 8.2 billion in the previous quarter.
The downside momentum surrounding the Pound may continue this week, according to Marcus Hettinger, head of currency research at Credit Suisse Group AG. The Pound may drop towards 1.0520 against the Euro before the ECB interest rate announcement on Thursday. The UK currency also dropped 2.4% in value against the U.S Dollar and may trade between $1.3500 and $1.4000 over the next three months, as equity markets struggle to hold on to their gains.
UK stocks retreated on Friday, trimming the FTSE 100 Index’s third straight weekly advance, despite reports that Barclays Plc jumped 24%, after Britain’s third biggest bank said that it passed tests conducted by the UK’s financial regulator and may not need to raise additional capital.
The Euro was unable to break above $1.3600 against the Dollar on Friday, weakening steadily through the course of the day. The single currency was undermined by comments from the German Finance Minister Steinbrueck, who said that the Euro would be put in jeopardy if there was fiscal irresponsibility.
The single currency was also unsettled by renewed speculation that the European Central Bank would follow the Federal Reserve and the Bank of England in engaging in some form of quantitative easing policy. European stocks also fell, ending a six day rally, as the degree of pessimism sweeping through the global economy reduced investors’ appetite for risk.
Reports in Germany showed that inflation slowed more than initial forecasts in March and to the weakest level in almost 10-years. Energy costs slumped and the steepest recession since the Second World War has curbed price pressures, threatening a period of deflation if consumer prices drop towards zero.
The inflation rate, calculated using the harmonised method of consumer prices, fell 0.4% from 1% in February, the lowest reading since June 1999. A 50% drop in crude oil prices over the past year has pushed the inflation down, just as companies are shedding jobs and business investment to cope with the economy slump.
The focus this week will inevitably fall on the ECB interest rate announcement on Thursday, and given the tone of recent rhetoric from a number of governing council members, the market is positioned for another 50 basis point reduction. That would leave the benchmark interest rate at a fresh historic low of just 1.0%.
The accompanying press conference will also be key in determining the short-term outlook for the Euro, amid growing speculation that the ECB will have little option but to engage in some form of quantitative easing policy. Any suggestions of move in this direction will undermine the Euro, which was already under pressure against the Dollar going into the weekend.
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