The pound fell around three quarters of a% against the euro and the dollar on Friday after a slew of weak data gave further evidence of a sharply slowing economy and added weight to rate cut expectations.
Figures showed mortgage approvals fell to a record low in November, while a separate Bank of England survey revealed that credit conditions are set to tighten further in the coming months. More grim news on the property market came as Halifax reported house prices fell 2.2% last month, while further data showed a near-record pace of contraction in manufacturing sector activity in December.
The euro rose to session highs against the pound above 96 pence after the data, keeping parity in sight. “The market seems to be looking for a higher euro/sterling, albeit rather cautiously,” UBS currency strategist Geoffrey Yu said, noting that trade remained thin after the Christmas and New Year holiday.
The euro had surged towards the end of December, hitting a record high of 98.05 pence on Reuters dealing systems on Tuesday, but the push towards parity failed as year-end positioning and profit-taking set in. At 11:52 a.m. British time, the euro rose 0.75% against the pound to 96.15 pence, while the pound lost 0.75% versus the dollar to $1.4492. On a trade-weighted basis, sterling was at 74.3, not far off the record low of 73.3 reached on Tuesday.
Volumes remained very low, however, with many traders still away after Thursday’s New Year holiday. “It feels reminiscent of the Christmas festive period in terms of liquidity levels, which are still very weak,” Rabobank currency strategist Jeremy Stretch said.
BOE RATE CUT EXPECTED
Friday’s data kept alive expectations that the Bank will continue cutting interest rates aggressively after slashing borrowing costs by 300 basis points to 2.0% between October and December.
The Bank’s Monetary Policy Committee meets next week, with a decision due on Thursday. Financial markets are currently pricing in a significant probability that rates will fall by 75 basis points to 1.25%. Earlier, market players took little comfort from John Lewis -- seen as a barometer of retail spending -- reporting a surge in sales in the days before and after Christmas.
Analysts remain unconvinced that consumer spending will recover and fear that more retailers could be pushed into administration in the coming months. “We strongly suspect that the sales effect will be temporary and that retailers will face a desperately difficult 2009,” Global Insight economist Howard Archer said. (Reuters)