special reports

British Pound Falls to Six-Year Low as Bank of England Cuts Growth and Inflation Forecasts

Wednesday, 12 November 2008 10:28:30 GMT  |  David Song, Currency Analyst

The British pound plunged below 1.5250 to reach a six year low against the U.S. dollar and slipped to a record low against the euro as the fundamental outlook weakened further.

Talking Points
• Japanese Yen: Falls Below 97.25
• Pound: Jobless Claims Surge 36.5K, Previous Revised to 36.3K from 31.8K
• Euro: Industrial Production Falters
• US Dollar: MBA Mortgage Applications and ABC Consumer Confidence on Tap

British Pound Falls to Six-Year Low as Bank of England Cuts Growth and Inflation Forecasts

The Euro slipped below 1.2550 after peaking to a high of 1.2632 as investors continue to limit their appetite for risk. Meanwhile, fresh economic data also dragged the currency lower as industrial production in the Euro-Zone slipped 1.6% in September, and certainly leaves the door open for another rate cut by the European Central Bank next month.

The breakdown of the report showed that production in Germany - Europe’s largest economy - plunged 3.7% from the previous month, followed by a 2.1% decline in Italy. The data suggests that economic activity may weaken further over the coming months as the Euro-Zone teeters on the brink of a recession, and the euro face increased selling pressures over the week as economists predict the economy to contract 0.2% in the third quarter. Fading growth prospects have certainly dragged on the euro, and may fall further against its currency counterparts as market participants expect the European Central Bank to lower borrowing costs at their December 4th policy meeting.

The British pound plunged below 1.5250 to reach a six year low against the U.S. dollar and slipped to a record low against the euro as the fundamental outlook weakened further. Individuals seeking unemployment benefits rose at its fastest pace in 16 years as jobless claims in the U.K. increased 36.5K to 980,900 in October to reach its highest level since 2001. Meanwhile, last month’s reading was revised higher to 36.3K from an initial reading of 31.8K. In addition, the ILO unemployment rate ticked higher to 2.7% from 2.6% in August as firms continued to cutback on employment as Europe’s second largest economy heads into a recession. Moreover, the Bank of England lowered their growth forecast for the next year, and expects price pressures to fall below the central bank’s 2% target for inflation over the next two years as economic activity falters. The dovish commentary by the MPC suggests that they will continue to aggressively lower the benchmark interest over the coming months, which would only stoke increased selling pressures for the pound in the near-term. The dour outlook for the U.K. paired with the comments by the central bank suggests that the Sterling will remain under pressure for some time as they expect the economy to contract throughout 2009.

Despite the slew of market moving during the European session, the economic calendar for the U.S. remains fairly light, and the dollar remains favorable as demands for carry trades falter. Increased fears of a global meltdown favor a bullish outlook for the dollar, and we may see the greenback strengthen against its major currency counterparts as the flight to safety continues. Meanwhile, House Speaker Nancy Pelosi pushed for ‘immediate action’ to bailout the troubled automakers in the U.S., but the opposition by the White House could weigh on the dollar as growth fears intensify.

Will The EUR/USD Fall to 1.2000? Join us in EURUSD Forum

Related Articles:
US Dollar Still the Safe Haven of Choice, Providing It with Bullish Potential
Euro Drifts Lower; Triangle Breakdown Set-up
BoE Governor Mervyn King Sparks Speculation for Currency Intervention as Pound Drops to Record Lows, Highlights Deflationary Risks

To discuss this report contact David Song, Currency Analyst: dsong@fxcm.com

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