Sterling crashes through 1.50 to US Dollar

After being sold aggressively across the currency markets yesterday the markets have taken a breather and we now await the next move. 

The political focus with the opinion polls over the weekend indicating that the chances of a hung parliament were much higher. A hung parliament may actually prove successful, however the markets do not like uncertainty and the consensus is that a coalition government will have less political clout to push through the decisive decisions especially in relation to tough fiscal planning which is inevitable.

The Conservatives have come out of the traps today stating that protecting the AAA status is central to their plans- however some feel their proposed aggressive cuts will be detrimental to recovery. 
 
On the other hand Labour propose to wait and cut later but waiting too long could mean that the horse has already bolted and the AAA rating could be lost. So this uncertainty and division is leading to a weaker pound. 
 
Yes this could be good for the UK economy and for recovery but there is a fine line between a weaker pound and the loss of confidence in Sterling and the UK economy- this would lead to a sharp rise in import prices and inflationary pressure especially if commodity prices remain high- not good; this would spill into a pressure on the UK gilt markets and inevitably the UK losing the AAA rating adding yet more pressure. 
 
So you can see the problem that uncertainty is creating. The Pound needs to get back above the psychological 1.50 level against the US Dollar. 

Sterling also lost yesterday on the purchase by Prudential of AIG’s Asian business which led to further selling of GBP and buying of USD in the light of this purchase. 

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Inflation figures create another letter from Mervyn King

UK CPI inflation rate came in at 3.1% against the expectation of 3.2% so slightly lower than expected. 

However the year on year rate is +3.5% and will require a letter of explanation from Mervyn King to Alistair Darling to explain why. King has regularly banged the drum that inflation will come down as we move through 2010 and today’s data to a small extent justifies his forecasts. 

However the data did not move the FX markets which have been quiet today considering the amount of market feedback. What the data does assist with is the BoE continuing with their policy of low interest rates and leaving the door open for further QE if deemed necessary.

Today European finance ministers are meeting again concerning Greece- feedback so far again is largely talk with no real details of the fundamentals of how assistance will be delivered. 

The ongoing situation is leaving the markets flat as risk is held off the table until further clarity is divulged. We have seen a further expansion in the credit default rates today for Greece reflecting the lack of clarity.

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UK jobs market is still on the ropes- CIPD

The UK economy is facing more redundancies, with substantial cuts expected in the public sector, a report has said.
Almost one in three public sector employers plan to shed jobs this quarter, the Chartered Institute of Personnel and Development (CIPD) said.
Its latest quarterly survey found that the jobs outlook had worsened despite the UK emerging from recession.
"The UK jobs market is still on the ropes," the CIPD said as unemployment currently stands at 2.46 million.
The number of people out of work had been steadily rising since the summer of 2008, but saw a surprise fall in the three months to November.
The latest unemployment figures will be announced on Wednesday.

In the public sector, defence and public administration look set to be hit particularly hard.
However, there was better news from the private sector, which expects to see staff numbers grow for the first time since the start of the recession.
The CIPD's survey also reveals that the outsourcing of jobs abroad is a concern for the employment market again.
One in 10 companies is looking to outsource jobs in 2010, with almost half of IT companies saying they would be moving jobs abroad.
India remains the most popular outsourcing destination, followed by countries in Eastern Europe.

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Sterling rides the currency markets rollercoaster

The good start for Sterling soon lost momentum following the Bank of England's inflation report and Mervyn King's press conference. 

The markets and sterling were initially boosted following a report in Le Monde newspaper of a Germany led aid plan for Greece. The ECB did not comment on these reports but the rumour alone was enough to drive the markets higher with the USD shedding some of its recent gains along with the Yen- GBP/USD pushed through 1.5750 and GBP/EUR 1.1425. 

However the markets made a quick U-turn as party pooper Mervyn King dampened the mood with a dose of reality- the key blow was the affirmation that it is far too early to conclude that no more QE needed.

This forced GBP/USD back to 1.5650 and GBP/EUR to 1.1350. Expect the "will they or wont they" that is the ECB assisting Greece to dominate the markets over the coming sessions.

In economic data from the UK earlier December Industrial production output came in stronger than expected at +0.5%. Good news for the UK economy but not significant enough to lift sterling. 

Sterling is suffering at the moment as it is being sold on the fear factor. Later today we have Bernanke’s testimony to the congressional committee- this could lead to some US dollar volatility.

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Sterling continues to stride ahead in 2010

Another bright start for Sterling which continues it's gains. 

Sterling hit a 6 month high against the euro and pushed higher against the USD. The move was initiated with the acceptance and recommendation from the board of Cadbury’s on the offer by Kraft. 

The Kraft offer values each Cadbury’s share at 840p and shareholders will be entitled to receive 10p per share in the form of a special dividend. Sterling gained on the back of the expected benefits from the M&A flows of the deal. 

Then at 9:30 official UK inflation data came in much better than expected- UK December CPI has come in at +0.6% month on month, +2.9% year on year, demonstrably stronger than median forecasts of +0.3%, +2.6% respectively. 

This has raised the prospects for a Bank of England interest rate rise in 2010 and it certainly offers the Bank of England something to think about in early Feb.

This data also heightens the view on the UK employment data later this week- better data here could reinforce the view that the UK is firmly on the road to recovery. 

The Pound hit a high of 1.1455 against the euro and 1.6457 against the USD before falling back from the highs- Mervyn King is due to speak later and the market will expect a cautious approach which could take the edge off sterling- we will see later..

The Euro is under pressure this morning as the fallout in Greece continues to undermine the single currency and in addition the German ZEW came in weaker than expected for the third month in a row. The euro is closing in on key technical levels against the USD and the EUR with EUR/USD close to breaking below 1.4275 and GBP/EUR targeting 1.15. 

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UK Pre Budget Report dominates today

All eyes will fall today on Alistair Darling’s pre-Budget report.

For the Foreign exchange markets close attention will be paid to the repayment of debt and growth forecasts along with the potential for a tax on UK bankers’ bonuses. 

All will be revealed later but the sentiment seems to be turning sterling negative as sterling has been sold off this morning against the Yen and USD. Today we have seen the UK October trade deficit widen to 7.1 billion against the forecast of 6.85 billion- not good timing for the chancellor as he looks to solve this ever growing issue. 

Other data from the UK confirms that whilst UK consumer confidence has come in positive, UK manufacturing output has stagnated in October and the British Chambers of Commerce downwardly revised its GDP expectations for 2009 and 2010. 

They are forecasting a 4.6% decline for GDP in 2009 and the 2010 outlook was lowered to 1% from 1.1%- it will be interesting to see how these forecasts align with that of Alistair Darlings later.

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Home insurance quotes for buildings and contents through Wise Money and save 10% on your renewal quote!

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Bank of England split on expansion of quantitative easing

Yesterday morning we had the Bank of England minutes which fed through a vote of 6-3.

The market initially perceived the split of 3 to be in favour of a lesser increase than the £50 billion expansion in QE decided.

In fact the 3 – King, Besley and Miles wanted an expansion of £75 billion which confirms two things; one is that assumption is the mother of all errors especially when looking at current market conditions and also that the MPC are very very cautious and would rather do more than not enough.

This leaves the door open for more Quantitative Easing especially as Mervyn King was petitioning for larger stimulus and paints a pointedly negative slant on the UK economy from the MPC…hence this led to sterling weakness against the USD and EUR.

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Sterling the star performer yesterday

Sterling was the belle of the ball in the currency markets yesterday gaining 1% against the US Dollar and the euro.

The positive trend was started wit the news that CPI data for the UK (a key indicator on inflation) came in unchanged at +1.8%. Although the inflation level is still below the 2% target a drop was widely forecast.

This was especially true against the BoE raising the QE programme by £50 billion and the feedback from the quarterly inflation report which noted that inflation was set to fall below 1%.

Sterling jumped on the news as the market digested a less dovish underlying data snap than the sentiment preceeding.

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Bank of England to pump another £50bn into economy via quantitative easing

The Bank of England announcment that it would pump another £50 billion into the economy to ensure continued recovery surprised many.

The move defied market expectations and put a dampener on hopes for a swift economic upturn.

The decision by the Bank to expand its programme of quantitative easing from £125 billion to £175 billion breaks the ceiling set by the Chancellor at £150 billion. It also confirmed that interest rates would remain at 0.5 per cent for a fifth consecutive month.

This is a huge surprise. All the rhetoric seemed to point to not doing very much more.

The Bank’s announcement was accompanied by a downbeat statement that the recession appeared to have been deeper than previously thought. It acknowledged that the Government had failed to persuade the banks to commit to higher levels of lending.

The move prompted the Tories to warn of the risk of inflation when Britain emerges from the recession. Philip Hammond, the Shadow Chief Secretary to the Treasury, said: “Every extension of the QE programme also adds to the longer-term risk of fuelling inflation when the economy recovers.”

In a statement, the Bank said that there were some encouraging signs, such as the stabilisation of the export markets and the benefits brought by a weak pound. It highlighted claims by business that “the trough [of the recession] is close at hand”.

It said that the lack of credit continued to dampen chances of a swift recovery. It said that it expected the quantitative easing programme to continue for another three months and that its scale would be kept under review.

Vince Cable, the Liberal Democrat Treasury spokesman, said: “With thousands of businesses still struggling to get loans, the Bank’s decision to put more money into the economy is the right way to go. As financial institutions continue to hoard money, quantitative easing has not yet fed through to the rest of the economy. It’s vital that it does.”

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Bank of England attacked for gilts sell off

Angry investors blasted the Bank of England on Thursday when it sparked a sell off in the gilts market after one of the biggest government bond offerings of the year.

In an interview published 20 minutes after the £5bn bond deal was finalised, Andrew Sentance, an external member of the Bank’s interest rate setting monetary policy committee, said it was considering whether to put on hold its quantitative easing programme designed to pump money into the economy.

Mr Sentance told Bloomberg that the issue at the committee’s next meeting, due to be held in early August, would be “whether we’re now going to move into a phase where we’re watching and observing what happens in the economy”.

His remarks raised expectations in financial markets that the Bank might be ready for a sustained pause in its injections of cash into the economy through the purchase of government bonds.

This is one of the biggest single gilts transactions of all time, and the Bank jolts the market with significant market-moving information only minutes after the deal has been sealed.

Benchmark 10-year gilt yields, which have an inverse relationship to the price of bonds, jumped 0.12 percentage points to 3.96 per cent on investor nervousness that quantitative easing could be nearing its end.

Investors said that, although yields on the inflation-linked bond sold on Thursday remained steady, Mr Sentance’s remarks spooked the market and could have repercussions for holders of gilts across all maturities.

The confusion overshadowed a successful bond offering by the UK Debt Management Office, which operates at arm’s length from the Treasury.

The inflation-linked gilt maturing in 2042 was the largest ever single transaction for a UK index-linked security.

Although it tries to avoid making statements at high-profile moments such as on Budget day, the Bank is not normally constrained by the operations of other branches of government.

As the chief arbiter of interest rates, the Bank would be concerned not to show any sign of trying to influence the cost of government debt. Any indication of collaboration could drive up the cost of debt if investors lost confidence in the Bank’s independence, analysts said.

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UK inflation rate falls below Bank's 2% target

UK Inflation tumbled below the Bank of England's 2 per cent target for the first time in nearly 2 years as the recession continued to take its toll on prices.

The Consumer Price Index (CPI) gauge of current UK inflation rate fell from 2.2 per cent in May to 1.8 per cent in June — the first time it has been under 2 per cent since September 2007, when the credit crisis began to grip the country.

CPI was dragged down by food and non-alcoholic drink prices which fell below May and June but increased over the same period last year.

Inflation soared to a 16-year high of 5.2 per cent last year as higher oil prices fed through into higher prices for consumer goods. But lower oil costs and falling consumer demand are now putting downward pressure on prices.

Today's inflation figures, which were in line with expectations, will fuel forecasts that the interest rate will remain at a record low of 0.5 per cent for months to come, and that the Bank may extend its scheme of quantitative easing next month, beyond the £125 billion sum it has already “printed”.

Official figures show that the wider Retail Price Index (RPI) measure, which includes housing costs, tumbled deeper than expected into negative territory to a record low. It fell from -1.1 per cent to -1.6 per cent on the back of steep drops in mortgage costs, the sharpest drop since records began in 1948.

The Bank expects CPI inflation to continue falling in the coming months before stabilising at below 1 per cent. As soon as inflation falls below this level, the Bank’s Governor, Mervyn King, will be forced to write to the Chancellor to explain why inflation has veered by more than 1 per cent from the target. Mr King has already written three letters to explain why inflation has risen above 3 per cent.

Food price inflation eased sharply during June, with the biggest downward pressure coming from meat, bread and cereals, fruit, vegetables and milk, and cheese and eggs. There was also a smaller downward effect from sugar, jam and confectionery.

But the rising cost of computer games acted as an upward pressure on inflation, the Office for National Statistics said.

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Bank pours cold water on economic recovery

The Bank Of England is sceptical about the so called recovery in the economy it emerged today as minutes of its June meeting showed it was united on a decision to keep rates on hold.

Minutes from the Bank's meeting two weeks ago revealed the nine member monetary policy committee unaminously voted to keep rates at their historic low of 0.5 per cent.

The Bank conceded that there had been "positive developments" in the economy over the month and that "the risk of a continued sharp contraction in output in the near term had receded."

However, it indicated that a spate of more upbeat recent economic data about the services, industrial and housing sectors gave less reason for optimism than business groups and commentators have suggested.

"Even if developments over the month had been positive, the increase in confidence apparent in some financial market indicators and some household and corporate sector surveys remained fragile," the minutes said.

"There was no reason to conclude that the medium-term outlook for the economy and thus inflation has changed materially since the Inflation Report had been finalised."

Last week, the Pound surged to its highest overall levels this year as hopes that the British economy is emerging from recession continued to burgeon.

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UK inflation falls less than expected to 2.2%

UK inflation fell by much less than expected in May, lengthening the odds of full blown deflation, official figures revealed today.

The consumer prices index (CPI) measure of inflation, the Bank of England's target measure, dropped to 2.2 per cent from 2.3 per cent. Analysts had expected a fall to 1.9 per cent. This is the 20th consecutive month it has been above the Bank's 2 per cent target.

The alternative retail prices index (RPI) inflation measure, which includes housing costs and upon which many pay deals are based, has already plunged into deflationary territory. But it delivered another surprise, edging up from -1.2 to -1.1 per cent last month on the back of rising mortgage rates, confounding economists' expectations of a further drop to -1.5 per cent.

In another sign that prices are rising, core inflation, which strips out volatile energy and food costs, also rose from 1.5 per cent to 1.6 per cent.

The increased price of cigarettes and alcohol, which rose as part of April's budget, helped to push inflation upwards, the Office for National Statistics said, but significant increases came from the rising cost of DVDs, televisions, clothing and footwear- indicating that sterling's weakness is filtering through as foreign made goods become more expensive.

However, policymakers and analysts still expect inflation to fall sharply over the coming months.

Sterling jumped by 0.6 per cent against the dollar to $1.6414 after the figures were released, and rose to the highest level this year against the euro, which fell to 84.44 pence against the pound.

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Sterling hits five week high against euro

The Pound hit a five week high against the euro and rose against the dollar on Tuesday as the UK currency was bolstered by renewed demand for London listed equities.

Global risk appetite had been whetted by strong earnings figures from US investment bank Goldman Sachs released on Monday, with sterling benefiting due to the UK economy’s perceived dependence on its banking sector.

The pound, viewed as a riskier currency than the dollar or yen, has tended to gain in tandem with stock markets and analysts at Commerzbank said that sterling should outperform in the currency markets as long as sentiment towards the financial sector continues to improve.

BNP Paribas however said that sterling’s robust performance against the dollar could be challenged if the forthcoming set of first quarter US corporate earnings delivers any shocks.

“Sterling will not be able to avoid the impact of any increase in asset market volatility over the coming week and hence caution with long positions is still required in the near-term,” BNP Paribas said.

“The pace of earnings releases picks up next week and still has the potential to deliver negative shocks. But the pessimism that has been built in to equity markets with many commentators now calling for new lows, is likely to cushion bearish news.”

The pound rose 0.3 per cent against the dollar to $1.4888, and strengthened by 0.8 per cent on the euro to £0.8928. Against the yen the pound was flat at Y148.53.

The dollar meanwhile regained ground against the euro as the wave of post-Goldman enthusiasm was tempered by caution ahead of economic data released later in the week. The euro fell 0.5 per cent against the dollar to $1.3300, but the yen was up 0.3 per cent against the greenback to Y99.76.

“This week’s calendar contains some data releases with the potential to challenge perceptions of improved risk conditions,” said Sean Maloney of Nomura.

“Most notably, US housing starts and permits for March are to be released on Thursday. Big rebounds in these data last time were at the core of some of the ‘green shoot’ arguments that have helped shape recent price action.”

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Doubts on quantitative easing policy as rates keep rising

Once again ditherer brown's incompetence is being highlighted.

It is only a few weeks since quantitative easing programmes were launched on both sides of the Atlantic – but already the effectiveness of the measures is being questioned.

That is because the purchase of government bonds by both the US Federal Reserve and the Bank of England is not helping sustain lower yields.

And it raises the prospect that the central banks will have to increase their fire power.

“The Fed’s problem is that the market realises that $300bn in Treasury buy-backs is just a drop in the bucket compared to $2,500bn in net Treasury issuance this fiscal year,” says William O’Donnell, strategist at UBS. “It’s a $300bn thumb in a dyke springing leaks everywhere.”

After falling to 2.5 per cent from 3 per cent when the Fed confirmed it would start buying Treasuries, the yield on the 10-year note is currently back around 2.9 per cent. This week’s selling of stocks has helped lower yields, but the move has been muted for now.

If 10-year US yields rise above 3 per cent, it may negate some of the recent decline in 30-year fixed mortgage rates, which are at historic lows for US home owners.

In the UK, the effectiveness of quantitative easing is also in doubt, after a euphoric start to the programme that saw benchmark yields plunge.

Yields on 10-year UK bonds have risen by about 50 basis points from a low of 2.91 per cent after the Bank of England announced plans to buy up to £75bn ($110bn) of gilts on March 5.

The increase in yields is partly due to signs of risk appetite returning to the markets, which takes away a natural support for gilts and Treasuries. The recent rebound in equity markets, amid hopes of green shoots appearing in the economy, has also put pressure on government bond prices on both sides of the Atlantic.

The rise in Treasury yields has been accompanied by rising inflation expectations as investors worry that the Fed’s outright purchases of Treasuries and mortgages under quantitative easing will ultimately spark inflation.

The expected average inflation rate for the next 10 years recently touched a six-month peak of 1.5 per cent, up from 1.1 per cent last month. Such an inflation expectation, however, is very low and dealers say supply is the main issue for the Treasury market.

The Fed’s planned purchases in Treasury debt this year is a fraction of the overall $6,000bn in outstanding debt and expected hefty supply due in the coming months and years.

For dealers, competition between the Fed and the Treasury creates a favourable trading environment at a time when dealer ranks have been thinned and bid-offer spreads are wider than normal, enhancing profits.

Trading opportunities have also flourished in gilts as dealers report that most sellers to the Bank of England have been hedge funds or bank proprietary desks. Many of these groups have sold bonds at high prices to the Bank of England and then bought them back at lower prices to book quick profits, which has no impact on the economy.

That is preventing the Bank of England from driving yields on 10-year gilts down to 2.5 per cent, a level where so-called real money accounts, such as life insurance companies, are likely to sell. It is hoped that these funds will then buy sterling corporate bonds, lowering the funding costs for UK companies and helping to stimulate the wider economy.

The rise in UK gilt yields comes amid worries that the Bank of England is not as committed to quantitative easing as dealers first thought following comments by Mervyn King, the Bank’s governor, to a parliamentary committee that the programme could be eased should signs of inflation emerge.

The Bank may make further comments on quantitative easing after its rate setting meeting today.

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Brown's reckless UK spending plans in trouble

The UK gilt auction by the debt management office failed to sell the small total £1.75bn on offer.

This is the first time such an auction has failed since 2002 and identifies probable concern over the health of public finances.

The failure in the auction will concern the labour government and follows a warning from Mervyn King on additional fiscal stimulus for the UK economy.

Future such auctions will be watched closely to gauge if yesterday’s failure was a one off or more failures will follow.

US stocks rose yesterday and the US economy was helped with a glimmer of hope from new home sales and durable goods coming in better than expected.

The dollar fell sharply for a brief spell yesterday as treasury secretary Tim Geithners comments were misconstrued by the market.

The basis of the comments was the suggestion of the US exploring Chinese proposals to incorporate a global reserve currency and so reduce reliance on the USD as a reserve currency.

Naturally the dollar was sold on this suggestion before clarification had filtered through to the media though this really shows how fragile and reactive the markets are in the present economic climate.

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Wise Money asks- is this a good time to invest?

Wise Money notes that the stock market has jumped by about 500 points in the past couple of weeks, but investors thinking of putting their Isa money into shares want to know one thing: is this the start of a sustained recovery or a dead cat bounce?

Stock markets have shown signs of life in the past few weeks. Since London's benchmark FTSE100 touched a six-year low earlier this month, falling below 3,500 at one stage, it has rallied strongly, closing at 3,912 on Tuesday.

America's Dow Jones index has also put in a good performance, posting one of its largest ever one-day rises following the announcement of a bail-out for banks' toxic assets.

But British investors wondering whether to use this year's Isa allowance before the deadline of April 5 have reason to be cautious: the markets have staged several apparent recoveries during the economic crisis, only to fall back again.

MARK HARRIS, FUND OF FUNDS MANAGER AT NEW STAR

"I think the lows in March may prove to be significant, but that a 'test' may occur in April. If we can make a higher low for equities in April, it will be positive for further gains. But I should reiterate that I still believe that we are in a very challenging environment, and that it will be a couple of years before we can say that this bear market is truly over.

"So, put simply, we will see the rally which is just unfolding, then a correction of about 15pc, and then a further rally to take the market up in total by about 40pc from the lows."

JUSTIN URQUHART STEWART OF SEVEN INVESTMENT MANAGEMENT

"Shares on a five-year view may be OK, although prices could be highly erratic.

"I think it's too risky putting all my money into one asset class so I've diversified my investments into a mix of commodities, property, international shares and fixed interest securities such as bonds.

"You can do this yourself in a self-select Isa but it could be expensive and time consuming. An easier way is to buy a multi-asset fund, which you can hold within an Isa.

MARK DAMPIER, HEAD OF RESEARCH, HARGREAVES LANSDOWN

"Come what may, do buy an Isa – use your whole allowance (£7,200, of which £3,600 can be cash).

"Unless you trust politicians – and I don't – they are going to try to get more money out of you by raising taxes. So shelter as much as possible from tax while you can.

"Some people think the Isa allowance is so small that it's not worth bothering. But the yearly sums accumulate: a couple who had used their full allowances for every year that Isas and their predecessors, Peps and Tessas, have existed could have built up £190,000 by now – and that's discounting investment growth.

"I suspect this rally is more of a dead cat bounce; it comes from a very low position. There seems to be a base at about 3,500. Let's be a bit careful but with the market about 50pc below its peak it has to be an interesting time to think about investing.

"With inflation of over 3pc on the CPI you would normally have interest rates at 5pc, not 0.5pc. So given the risk of inflation taking off I'd consider gold, via a fund such as BlackRock Gold & General.

"This rally is still more hope than anything else, the kind that has a habit of disappointing. I wouldn't push a load of money in; I'd wait for bad days and drip-feed it in then. The markets are not about to race away but one of these days they will, so don't wait for ever.

"Eventually, there will be the mother of all rallies."

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G20 meeting brings no surprise

There was actually very little news at the G20 on the forex markets and recent volatility.

The euro has bounced higher against the dollar and breached 1.30 again- perhaps prompted by the news that the under pressure emerging markets in the euro zone will have more resources available to them by the IMF if necessary, causing a jump in the euro.

USD also weakened on the more bullish market sentiment; with equity markets bouncing with the pound gain back above 1.40.

The bounce in Sterling which has gained back above key technical levels on the USD and the EUR identifies a more positive feeling within the UK economy. The Rightmove Housing survey released overnight also came in slightly positive with a 0.9% month on month gain.

With the Swiss and possibly other economies looking to adopt Quantitative Easing it may be perceived that the UK is ahead of the game. Still early days and recent news that 10 jobseekers are applying for every vacancy signifies a mountain to climb before the UK economy recovers.

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What a difference a day makes

The equity markets surged higher after reports that Citigroup’s chief executive said that the US bank was profitable in the first two months of the year.

This helped the US dollar weaken across the board as risk appetite came back into play- a real turnaround for the heavily sold markets on Monday: also a real turnaround for Citibank who were rumoured recently to require more help from the government.

In the markets the dollar weakened against a basket of currencies but maintained strength against the pound and the euro.

The markets at the moment are mixed on the impact of printing money and currently it is being conceived as sterling negative due to the uncertainty and the de-stabilising short term effects it could have.

However on the flip side many economies may need to follow suit as policy easing will not be sufficient to increase money supply, therefore the UK may be ahead of the game- time will tell!

As the introduction of QE is new then undoubtedly the chatter and debate has spiralled with economists…in the words of George Bernard Shaw "If all the economists were laid end to end, they’d never reach a conclusion. " so let us hope that actions will be more effective than words on creating inflation.

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RIP Prudence, Zimbabwe here we come

The Bank of England opens a new front in its effort to ward off deflation today as it prepares to buy government bonds with newly printed money.

The central bank will purchase as much as £2bn of gilts, its first deployment in a three month plan that may see it waste £75bn. The final results of the operation will be released after 2:45pm. today in London.

The move marks a new departure for British monetary policy after officials cut the interest rate to a record low of 0.5pc on March 5, requiring them to seek new tools to stop the economy’s downward spiral.

While Governor Mervyn King hopes that pumping new money into the financial system will work, he’s relying on banks battered by the crisis to pass it onto lenders.

The Bank of England says it will give details of the auction this morning in London, without being more specific. The bank unveiled the plan last week after delivering a final cut in the key interest rate to a record low of 0.5pc.

Policy makers such as Andrew Sentance are concerned a “prolonged and deep recession” will stoke deflation and the National Institute of Economic and Social Research said today that the slump deepened in the quarter through February.

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The euro is in the spotlight

The Pound held up well yesterday as the latest inflation data confirmed that CPI fell 0.7% in January bringing the annualized level to 3.0% which is down slightly from Decembers 3.1%.

The 3.0% level is still well above the Bank Of England’s 2% target for inflation and this data suggests that interest rates may not need to be cut in March as previously thought.

However inflation will remain a concern for the Bank Of England- Mervyn King has already signaled that inflation could fall sharply this year and todays BOE minutes will give us more insight to the sentiment of the MPC.

The euro was the big loser in the currency markets yesterday falling to 2 month lows against the dollar and also retreating against the pound…real concern is now prevalent on the health of eastern European banks.

With the threat of a downgrade in credit looming over eastern European subsidiaries of Swedish and Austrian banks coupled with the expectation of more banking losses in Europe forcing the euro lower.

The EUR/USD moved to a low of 1.2548 and 1.25 is now the key target before a break to 1.2312…GBP/EUR failed to hold above a move back to 1.13 yesterday, however this will again become the target as the spotlight remains on the euro and its woes.

Overnight the final approval was placed on the US stimulus package of $787bn which is desperately hoped will kick start the global economy. The urgency of Obama to introduce this stimulus was justified as General Motors and Chrysler have requested another $21.6bn on top of the $17.4bn already received.

This caused a sharp sell off in equities- in particular the Dow as risk aversion kicked in.

One to watch in the markets at the moment is USD/CAD which has broken a key resistance level of 1.26…with risk aversion and the falling value of Oil we could see this pair re-test the 1.30 level in the near term.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

UK GDP set to fall by 4% in early 2009

Lots of data yesterday in the UK, of particular interest was the Bank Of England inflation report which showed inflation at just 0.5% in two year.

This means more interest rate cuts and the ever increasing probability of quantitative easing. It seems that the Bank of England will try a plethora of measures to kick start the UK economy and bring inflation back into line.

The immediate impact of this was a sell off in sterling against the majors- sterling was not helped by employment data as the UK jobless figure rose to just under 2 million.

Another hammer blow was the rhetoric by Mervyn King which stated that the UK economy is in deep recession and that GDP will fall by 4% in early 2009.

Elsewhere, Canada posted their first trade deficit in 32 years as exports dipped especially in relation to the US- this is a far cry from the good times as surpluses bulged.

The deficit came in at C$0.46 billion in December and emphasises the seriousness of the economic slowdown globally- this data helped the CAD to drop quickly to 1.2511 from 1.2430 against the USD- Finance minister Jim Flaherty mentioned that the recent strength of the Canadian dollar has not helped.

In other data from Canada- new home prices fell 0.1% which gave an annual increase of 0.4%- the lowest since 1997. In the US the trade deficit shrank by 4% in December as imports and exports fell as global trade shrinks.

A rush back to risk aversion is highly evident in the last 24 hours as the US financial stability plan fell short on detail- the Dollar and the Yen again benefited as equity market slumped and looked uncertain- this is now an ongoing theme between risk appetite and risk aversion.

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Bank of England cuts rates by another half per cent

At the December get together the decision was made to cut rates by 100 basis points but the discussion was centred on whether this was enough.

Yesterday, there was no mention of debate as to the magnitude of cut. This might emerge in the actual minutes to be published on 21st January but for the time being one has to assume that the focus was directed at alternative measures for stimulating the economic revival rather than on the ‘big hammer' of continued interest rate reductions.

Makes the 21st release even more important for the market. Sterling had a good day, the Stock Market was less impressed. Interest rates eased a few basis points but given that the 0.50% cut had been priced in already, the reaction was predictably mooted.

Today's industrial production figures from the Eurozone are already out and were worse (considerably worse in France's case) than expected and even though the retail sales figures were a little better, the overall view is still negative.

As indicated above, this persistent build up of bad news must weigh upon the Euro. From the UK, manufacturing output slumped at its fastest annual pace since the early 1980s and much more than expected in November, this morning's official data showed.

The figures indicate that Britain could be heading into a severe downturn and will likely reinforce expectations that interest rates will head towards zero this year. Seperately, producer price inflation figures from the ONS came in stronger than expected in December.

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Credit crunch weighs wise money down

Only time will tell, but there are increased mutterings that data for the 4th Qtr of 2008 might prove to be as bad as its going to get.

With the sharp falls in GDP forecasts for the €˜industrial nations, accompanying massive rises in unemployment, the outlook still looks grim. All the negatives however are starting to be countered by positive moves from the Governments with regards to fiscal stimulus in conjunction with the already seen, monetary easing.

The US, Canada and UK are all intent on kick-starting their economies through good-sized packages. The €˜almost agreed bailout of the Big 3 US car manufacturers goes towards proving this point.

Only the Eurozone appear to be dragging their collective feet and therefore it will be said region that will recover more slowly than the rest through a continued lack of demand. Even the VERY bad news is having less of an effect on markets.

The non-farm payroll numbers from the US on Friday were horrifically large with the figure coming in much, much higher than market consensus. Did this pull away the rug from beneath the Dollar?

Well not in the way that it would have done in years gone by. It shows that investors and traders are now fully braced for the severe recession and that tolerance for bad news is now far greater than has been seen up to now.

Looking ahead this week, top-tier data is lacking but several speeches by Fed Reserve members will be in focus as the FOMC meets next week. The Fed have signalled in the past that there is no floor for the Fed Funds rate and discussions over quantitative easing will likely re-emerge.

Elsewhere, the German ZEW survey tomorrow looks to be the highlight with the numbers expected to reinforce the opinion that the German and hence the Eurozone economies have further to decline before any sign of the green shoots of recovery.

From the UK, economic data is almost entirely focused on tomorrow when we get the BRC Retail monitor, trade numbers and industrial production.

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The road to recovery

The US Treasury announced yesterday that it will spend at least $250 bn on preferred equity from major financial institutions.

The plan is in some ways a turnaround for the government which initially seemed to be focusing on the $700 bn programme authorized by Congress on buying up illiquid assets that were clogging the banking system.

German's ZEW sentiment survey released yesterday reflected a deterioration in confidence in September, the height of the financial crisis.

The ZEW said that perspectives for economic development have significantly deteriorated due to the financial crisis but a separate analysis following the bank rescue package reveals a less pronounced decline in expectations.

In the UK CPI released yesterday posted a higher than expected 5.2% - the highest since 1997. Whist on the surface a high reading may be deemed to be problematic for the Bank of England the MPC's focus seems to be shifting to that of growth concerns as inflation is forecast to cool by mid-2009.

In the same breath, UK unemployment rose to the highest level in almost two years, slightly ahead of expectations as market participants forecast a significant deterioration in the labour market.

Risk appetite continues to play a significant role in the market, whether it be equities, cash, commodities or currency. Sentiment for sterling remains positive as the UK government continues to lead the way in dealing with the current challenges in the market.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

BoE minutes as expected...retail sales to follow.

Yesterday, the BoE minutes confirmed what the market had been expecting with a 7-1-1 split, the majority sticking with the status quo and keeping rates on hold.

The hawk of the MPC, Tim Besley, voted for a hike arguing a pre-emptive rate rise would assist in halting inflationary pressures. David Blanchflower as usual cited downside risks to growth weighed far heavier than the inflation problem.

The rhetoric in the minutes echoed what was said in the inflation report, maintaining that there was greater downside risks to growth, that inflation would remain above the 2 percent target for the majority of the forecast horizon but that it will fall below this target at the 2-year mark.

Staying in the UK, CBI industrial trends came in slightly below market expectations at -13 yesterday and today we look to UK retail sales to give us direction.

Market expectations are for retail sales to decline again for the month of July following other recent weak data releases. The number surprised to the upside in May so it will be interesting to see how our capacity to spend faired last month.

Today in the Euro-zone, PMI surveys will give an indication of how manufacturing and services are fairing. The Market expects numbers to marginally decrease on the month in contradiction to the upbeat numbers released in the ZEW sentiment index on Tuesday.

Recent USD strength seems to have waned following slight rises in gold and oil prices taking other commodities with them. There are concerns too for the large US mortgage institutions and their ability to raise cash which is contributing to the dollars slowing pace.

US labour market weakness is expected to continue today with the release of initial jobless claims reporting around the 43k number with continuing claims expected to show an increase to nearly 3.5m. Later in the afternoon, we'll see the Philadelphia Fed which has been soft all year but might pick up a little following recent ISM readings around the 50 level.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Pound slumps following inflation report

The Bank of England released its quarterly inflation report yesterday giving the bleakest assessment of the UK economy for over a decade.

Mervyn King, governor of the BoE, warned that the coming year was going to be difficult and that there was "bound to be a quarter or two" of negative economic growth. This was coupled with predictions inflation would rise to over 5% in the short term before falling back to the 2% target level within 2 years.

Prior to the inflation report the July UK unemployment figures were released with unemployment increasing by 60,000 in the quarter, a sharper increase than the 13,000 reported in the first quarter.

The combination of lower growth expectations and the reversion of inflation to target levels means markets are now pricing in interest rate cuts earlier than previously estimated. Investors are pricing in a 60% chance of interest rate cuts by the end of the year as opposed to 12% prior to the report.

The pound declined to its weakest level in 22 months against the USD falling below $1.87, and fell back below €1.26 against the Euro.

The appreciation of the USD was tempered after US retail sales had reduced by 0.1% in July; an indication the boost to the US economy from the recent tax rebates may already be fading.

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The hawks eye the BoE's quarterly inflation report

In the UK, the short end of the gilt market shrugged off anther set of poor inflation figures highlighting the current bullish rate sentiment.

July CPI increased to 4.4% year on year in July from 3.8% in June. Worthwhile remembering that the Bank of England had July's inflation data in its hands when policy was unchanged last week. With the latest utility price hikes still to kick in headline inflation looks set to reach 5% in September.

The Bank of England's Quarterly Inflation Report is due at 10.30 today and will be closely scrutinized. Although the BoE's latest Inflation Report looks certain to downgrade its 2009 GBP projection, the near-term inflation outlook should be revised sharply higher.

Given this, a hawkish press conference from Mervyn King is likely, keeping the door open for a possible rate hike if needed. The key issue for the markets remains whether the growth slowdown will be sufficient to push CPI below its target on a two year horizon. Labour market data should also be monitored, particularly wages.

In the US, Treasuries rallied yesterday on renewed financial worries, leading to a steepening of the yield curve. Dovish comments by Fed member Gary Stern who stated the Fed "should be patient" in raising rates were also supportive.

Fed hawk Fisher also gave relatively pessimistic remarks about the growth outlook. June's trade data was better than expected but evoked little market reaction.

Briefly on the Eurozone. Policy wise, recent ECB comments have been mixed. On the one hand, Bini-Smaghi warned that Euroland growth had worsened significantly recently. On the other hand, ECB hawk Weber continued to highlight inflation worries.

Today's Eurozone industrial production should highlight the difficult outlook for the corporate sector but this will be overshadowed by US retail sales where the market is looking for a weaker July figure signaling that the positive impact of recent tax rebates has faded.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.