FX: The Pound has dropped through $1.54 against the U.S Dollar this morning
Market Update 6th September
The Pound has dropped through $1.54 against the U.S Dollar this morning, erasing Friday’s gains following the U.S Non-farm payrolls data. The UK currency also fell against all of the 16 most actively traded currencies, amid speculation that the Bank of England will consider extending emergency stimulus measures on Thursday. The Pound has also slumped a further 0.4% against the Euro to trade well under the pivotal 1.20 level, as investors become increasingly pessimistic about the UK economic outlook. Recent data has indicated that the recovery peaked in the second quarter, as a barrage of negative reports indicates that the key components of the economy are slowing.
The recent estimate of UK gross domestic product in the three months to June increased at the fastest pace since 2001 at 1.2%, but declines in housing, manufacturing and construction has added to fears over a second recession. Data released on Friday showed that futures traders increased bets that the Pound will decline against the Dollar, after an index of UK services industries dropped in July to the lowest level since April 2009. UK interest rates are set to stay at the record low of 0.5% for longer, as policy makers may look to shore up the recovery by extending quantitative easing beyond the current £200 billion.
The Pound is likely to decline further against the majors in the build up to Thursday’s announcement and with Andrew Sentance expected to, once again, be the sole voice for an interest rate increase, we could be left with a three-way split among committee members on monetary policy. A bit of much-needed positive news was released this morning, as a report showed that UK factory production grew at a record pace in the third quarter, according to the Engineering Employers Federation. The number of producers saying that sales rose in the three months through September exceeded those reporting declines by 33%, compared with 30% in the second quarter. A gauge of export order rose 7 points in the third quarter, after the Pound fell roughly 21% on a trade weighted basis since the start of the recession in 2007, making UK exports more competitive.
Bank of England MPC member Charles Bean said in August that the UK economy remains in a “fragile state” and further action may be necessary to keep the recovery “on track.” The Pound continued to decline against the U.S Dollar this morning, despite UK stocks advancing for a seventh straight day. The increase in risk appetite has seen the Euro bounce back against the U.S Dollar, but the Pound remains susceptible to the ever-changing economic outlook. The benchmark FTSE 100 Index has recorded its longest winning streak since June, after rising 4% last week.
Aside from the Bank of England interest rate announcement on Thursday, the focus this week will fall on the latest industrial production data and trade reports for July, as well as the Producer price index for August. In addition, Wednesday’s report from the National Institute for Social and Economic research will be watched closely, with leading indicators pointing to a sharp downturn in the rate of recovery in the second half of the year. House price data from Halifax are also expected to feature, alongside the Nationwide consumer confidence and BRC retail sales survey for August.
