Foreign Exchange: Pounds Falls Against The Euro And US Dollar

As the economic outlook continues to worsen, including unemployment at the highest for 15 years, the pound fell against the Euro and the US Dollar.

There is mounting speculation that the Bank of England will need to engage in further asset purchases over and above the £75 billion increase announced last week.

The preliminary third quarter economic growth figures will be released this month and may show a contraction in growth during the three months to September. If this is the case and the economy continues to contract in the fourth quarter, which seems increasingly likely, then the UK will technically be in recession again. This will clearly impact on the strength of the pound in the foreign exchange markets.

The Pound declined the most against the Yen, as the threat of a recession and further quantitative easing undermined traders’ appetite for riskier assets.

MPC member Adam Posen said earlier this month that the MPC “will readjust the plan if it turns out we need more.” While his colleague Martin Weale also said this month that the Bank has a “lot of scope” to increase asset purchases if it is deemed necessary to boost economic growth.

UK gross domestic product is currently 4.4% below its peak level in early 2008, which represents the weakest recovery for almost a century.

Alistair Darling, the finance minister in the previous Labour government, warned yesterday of “a very long period of stagnation with tremendous cost to the country.”

The Pound declined yesterday even after a report showed the UK trade deficit narrowed in August, as exports rose to a record level and imports fell. The gap in trade shrank to £7.77 billion, from £8.15 billion in July. Exports rose 0.6% to the highest level since current records began in 1998.

EUR/USD

The Euro rallied against the US Dollar yesterday, as Slovakia finally passed the vote to extend the EFSF, while the single currency also gained against most of the majors, ahead of the G-20 meeting when finance ministers meet to discuss plans to tackle Europe’s debt crisis.

The Euro bounced back from an earlier decline as Spain’s credit rating was cut by Standard & Poor’s to AA- with a negative outlook, the third time the nation’s rating has been lowered by S&P since 2009. Spain has a jobless rate of over 20% and the threat of contagion to other high deficit nations will continue to have an impact.