Pound Plummets Overnight
Pound Sterling - UK Markets
Sterling reached a five year low against the Dollar overnight after King's comments that the UK economy is probably in recession. The Pound suffered the sharpest drop in 16 years after ‘Black Wednesday' of 1992 against the dollar and also declined at the expense of the Euro and other major currency partners. King stated the banking crisis is the closest the economy has come to financial apocalypse since WWI.
Sterling will face continual pressure in coming months due to the service based and export reliant economy of the UK. Yesterday CBI Trends came in at -39 points, ahead of the conservative estimate of -30 and as opposed to -26 in September. Similarly business optimism has declined from -40 to -60 across both the domestic and international sectors. RBS and Barclays shares plummeted 6% yesterday in response to King's speech and the MCSI Index lost 2.4% in London this morning as economic slump made itself apparent in markets.
Weak economic output is favouring likelihood of an interest rate cut and is being priced into the declining value of Sterling. MPC minutes released this morning will provide an indication of the likelihood of this. Retail sales data is also due this morning and we can expect to see some aggressive policy from the UK government and Bank of England to offset the pending recession.
US Dollar - US Markets
The US Dollar gained overnight against all its major currency partners except the Yen, including a whopping 5% on the Australian Dollar. This morning the Pound was valued at 1.6413 against the US Dollar and the Euro at 1.2901.
Despite the crisis originating in US markets, the Dollar is retaining strength, reaching 2 year highs against a basket of currencies overnight, due to its safe haven status and the repatriation of capital flows.
Global equities are again in decline, but lower rates of interbank lending indicate increasing movement in liquidity. Crude oil has fallen below $68 a barrel as weakening demand overrides concerns about a cut in production. OPEC is to announce a decision on October 24 over whether to cut oil production by 1 million barrels a day.
Euro - European Markets
The Euro fell below 1.28 against the US Dollar overnight, the lowest since November 2006 and this morning is trading at 1.2901. The Pound is down to 1.2721 against the Euro in a day that saw the Euro strengthen against a basket of major currencies, with the exception of the risk-averse Japanese Yen and Swiss Franc.
The Euro remains solid after the boost from the French central banks yesterday yet economists are predicting the single currency may be overvalued Euro and may weaken in conjunction with likely ECB interest rate cuts next month.