Further volatility occurred yesterday and Sterling plunged to a new record low versus the Euro. The Pound recovered to 1.11 this morning and has gained on the US Dollar, breaking through the 1.5 level ahead of interest rate cuts to be announced later in the day.
Yesterday the Rightmove House Pricing Index showed house prices continue to decline in the UK. Annual rates show a drop of 6.3% with another 10% decline forecast for 2009 as unemployment and credit conditions remain dire. In response, the Treasury has announced the return of 100% mortgages with a host of government guarantees to stimulate the property market. Consumer and Retail price indices from the UK this morning show inflation rates are declining, largely on the back of lower energy prices. The Bank of England Inflation letter is also out today.
The US Dollar has weakened ahead of the Federal interest rate decision and is lower against its Asian currency partners this morning. Global equities lost ground yesterday as banks revealed their exposure to the Madoff fraud and the Dow Jones closed down 0.8%.
A 0.5% reduction in the Federal Reserve base rate is expected this evening in an attempt to revive consumer spending in credit crunch conditions. Since the credit crisis began in August 2007, interest rates in the US have been slashed from 4.25% to 1%. Yesterday the Federal Reserve also announced industrial production has fallen by 0.6% for November, while manufacturing fell by 1.4%. These figures are expected to continue to revise annual growth rates downwards in 2009. The Madoff fraud in the US has provided another knock to market confidence which is already languishing at record lows. Although the US Dollar has weakened, its exposure remains limited due to its safe haven status when markets turn to risk aversion. Consumer Price Inflation and Housing Stats are due along with the FOMC decision in the US today.
The Euro has remained strong overnight, having reached another high of 0.90 versus the Pound yesterday. It is currently trading at 0.89 against Sterling and 1.36 versus the US Dollar.
Despite calls of approaching parity with the Pound, the Euro is perceived as overbought by some economists and could suffer as the extent of recession in the Eurozone emerges. EMU figures for the Purchasing Managers Index for Services and Manufacturing are due today, along with the change in employment, while consumer price inflation statistics are due for the Eurozone tomorrow.
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