Why is the pound in a state of collapse ?

[DC]

This thread started with the Pound at €1.244, that would have been an excellent time for residents to buy all the Euros they could afford.At €1.07 to the pound now,buy now or sit it out?

[yllig]

Is there any good news.....?

[John50]

From Money Futures

Reasons Why the Pound has Devalued against the Euro

UK Economy in steepest recession.

The UK economy experienced negative growth in Q3 2008 and is now facing steepest recession since Second World War. (industrial output collapses) Because of sharp slowdown interest rates have fallen sharply from 5.25% to 2% (and will probably go lower)


Lower interest rates are very important for weakening a currency.

Lower UK interest rates make it less attractive to buy Sterling and save money in the UK. Therefore, there are less hot money flows and a weaker value of Pound.

Housing Market.

The UK Housing Market plays a crucial role in determining consumer confidence, spending and economic growth. Recently the rate of house price falls has accelerated and some people predict house price falls of upto 30%. If house prices fell by another 15%, growth would slow down alot in the coming months. Again, this would lead to lower interest rates and a lower exchange rate. The markets are anticipating lower interest rates in the UK.

Credit Crisis.

The UK is heavily exposed to the credit crisis because mortgage lending accounts for a high % of disposable income. Mortgage lending is more important in the UK than the Eurozone where mortgage payments account for a smaller % of disposable income. With less mortgages becoming available, demand for housing is falling. Also those with existing mortgages are seeing the cost of remortgaging increase. This is putting pressure on the Bank of England to reduce base rates to compensate for the increased bank rates. As they explained the recent interest rate cut:

"The disruption in financial markets could lead to a slowdown in the economy that was sufficiently sharp to pull inflation below the target."


The Euro is slowly becoming the World's Reserve Currency. With the Dollar in long term decline (and with good reason) government's and investment bankers are looking for an alternative to holding currency in the dollar; the main alternative is the Euro.
However, it is worth noting the Pound has recently been weak against the Dollar as well, suggesting problems facing Sterling in particular.

UK Current account deficit.

Relative to the EU, the UK is running a current account deficit, which puts downward pressure on sterling because of the outflow of foreign currency.
Large Rise in Government Borrowing for 2009. With government bailouts, fiscal expansion and tax cuts, government borrowing will be over £115bn or 8% of GDP. This causes lower confidence in the UK economy to pay off debt (though UK public sector debt is still lower than many of our European counterparts)

Predictions for Pound vs Euro in Next Few Months.

Now that the pound has fallen to £1 = 1 Euro, it is hard to see it falling much further. Some foreign currency dealers are still pessimistic about the Pound, so in the short term this may continue to push the pound lower. But, it should not be forgotten that the Eurozone is also in recession, so we are likely to see lower EU interest rates in 2009

The strength of the Euro is also causing problems for EU exporters.

Conclusion

The Pound has fallen on the back of depressing economic statistics. The whole Global economy is likely to experience recession, but, the UK recession has been deeper than most. Against this backdrop the pound has been weaker.

This Sunday 21st December, 2008 the euro costs 93.2 pence, the pound 1.073 euro.

[yllig]

No-one wishes other countries to be in the soft stuff but its certainly makes you feel a little better to hear this news.

[John50]

OK, here's something to start you off

Germany and France prepare to pump in more money as recession deepens | Business | guardian.co.uk

Thankyou. I hope some of the evils sods who bet on currency rates and who have rushed to the euro like lemmings have a damned good read of that and that the press corps make a huge issue of it. They are all in the cart.

[Armin Tamzarian]

A bit of good news ! £ up to 1.075 meaning a euro is 93 p. I know I shouldn't but lets hope for a bit of vociferous bad press on the euro economy and some threats of ECB rate cuts.

OK, here's something to start you off

Germany and France prepare to pump in more money as recession deepens | Business | guardian.co.uk

[John50]

A bit of good news ! £ up to 1.075 meaning a euro is 93 p. I know I shouldn't but lets hope for a bit of vociferous bad press on the euro economy and some threats of ECB rate cuts.

[John50]

That is a very interesting piece and echoed by several German economists and industrialists on the TV last night. They were not happy with the ECB lagging behind the other central banks and believed interest rates cuts in Europe needed to happen. Let us all hope so.

Good to see the £ buying 1.07 this morning, meaning the euro costs 93.4 pence.

[yllig]

Maybe this bit of news today in the Daily Telegraph will shift the European Central Bank to drop their interest rates and help the £ a bit.


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[6mauledrv]

Pound showing slight gains this morning, so far.
Let's hope it continues. ATM, 1.056 against euro.

[Warrior]

Its only 1.049 now. I think the UK will soon be a third world country if Brown and his cronies are in power for much longer. Except that whoever replaces him may not be able to put things right anyway. Dont think too much of David Cameron. Too much like Tony B.

It said in the paper today that Gordon Brown may call an election before the next one is due in 2010. Not sure why he would do that as he must know he will be kicked out. Lets pray for that.

Amen to that!
Britain has long been a near bankrupt little island off the coast of Europe that hasn´t deserved to be known as GREAT Britain for a long time.
It has a Treasury, so called, to house all the gold it nicked from Spain, and a Commons Chamber that produces so much hot air that it must be responsible for all the global warming of the whole world.

[yllig]

Its only 1.049 now. I think the UK will soon be a third world country if Brown and his cronies are in power for much longer. Except that whoever replaces him may not be able to put things right anyway. Dont think too much of David Cameron. Too much like Tony B.

It said in the paper today that Gordon Brown may call an election before the next one is due in 2010. Not sure why he would do that as he must know he will be kicked out. Lets pray for that.

[6mauledrv]

Pound's weakened again - now at 1.05 to euro.
Also heavily down against other currencies.
Sorry, but it looks like a major sell off.
Worrying is the fact that the euro too is weak!
Pound's lost 6% today against the ZAR - South African Rand?

[6mauledrv]

It's the euro making most of the gains today.
e.g. up 1.3% against USD, 3% Yen, 0.5% ASD, down slightly against NZD.
The pound atm (12:1 1.06 against euro down 1.4%. Also down slightly against most currencies but 2.5% against swiss franc and NZD.
So today's desirable currencies are: Australian, New Zealand, Canadian dollars and, of course, the Euro.

pound strengthened a bit today - only lost 1.2% atm. Currently at 1.0620. In fact it's the euro showing some weakness today.
Let's hope it continues.

[John50]

The Pound plunged to a record low against the Euro yesterday as unemployment rockets to the highest level since 1991

Posted: 18 Dec 2008 03:31 AM CST
The Pound plunged to yet another record low against the Euro yesterday, dropping to a low of 1.0703 versus the Euro, while also registering sharp losses versus a basket of currencies following reports that UK jobless claims rose in November at the fastest pace since 1991 and the BoE minutes increased speculation that interest rates will be cut to zero per cent over the coming months.

According to a report from the Office of National Statistics, the number of people out of work and claiming benefits rose 75,700 from October to 1.07 million, the highest level since July 2000, and unemployment will continue to rise sharply over the coming months as UK companies slash jobs amid the worst financial crisis in almost a century sends shockwaves through the market.

Manufacturing and service sector growth has contracted at the fastest pace in decades and companies affected by the worldwide economic slump and almost 30,000 jobs are under threat from the collapse of Woolworths Plc and MFI Retail Ltd after both retailers went into administration last month and has struggled to find buyers.

The Prime Minister Gordon Brown responded to the unemployment data by telling reporters that the government is prepared to do whatever is necessary in order to improve the labour market as business service companies are expected to cut a further 275,000 jobs over the next two years as the deepening and prolonged recession ravages the advertising and real estate industries.

The UK claimant count rose for a tenth consecutive month in November, the longest stretch of losses since the 16 months through June 2006, and the meteoric rise in claims was revised to 51,800 in October from 36,300 and the jobless rate was last above the 1 million mark in January 2001.

The UK economic boom over the past 16-years has well and truly ended as the economy contracts 0.5% in the revised figures for the third quarter and recent estimates from the Bank of England indicate that growth will shrink 1.3% in 2009 despite severe monetary easing and the government's efforts to revive lending.

Gordon Brown's handling of the credit crisis has drawn support and seen his party recover in the polls but the Labour party face the prospect of fighting the next election with unemployment approaching 3 million, a level last seen under John Major's tenure as Prime Minister in the early 1990s, and that may encourage Brown to hold a general election before the deadline of June 2010.

The Pound also declined against the Dollar after rising to a high of $1.5618 the previous day following the Federal Reserve's unprecedented decision to cut U.S interest rates to between zero and 0.25% but the focus yesterday fell squarely on the release of the minutes from the Bank of England's last policy setting meeting.

Policy makers lowered interest rates to just 2.0% in December, the lowest level since 1951, and the report yesterday showed that the nine-strong monetary policy committee voted unanimously to cut rates this month, while the accompanying statement indicated that a more aggressive action was considered, which would have brought borrowing costs to the lowest level since the Bank's foundation in 1694.

The chairman of the Bank of England, Mervyn King, said that a larger cut "might be justified by the scale of the downside risks to inflation" and the Pound subsequently declined to yet another record low versus the Euro amid speculation that UK interest rates will be cut to 1.0% in the first quarter of next year.

The monumental decline in Sterling sentiment shows few signs of abating as investors speculate on the possibility of parity with the Euro but the minutes yesterday also highlighted that the depreciation of the Pound "should act to support next export growth" and policy makers are actively talking down the UK currency with the hope that a weaker Pound will attract overseas demand in UK exports.

However, manufacturing only accounts for roughly 14% of UK gross domestic product and the worsening economic climate means that companies are scaling back their workforce and factory production, while the worldwide slump is unlikely to boost demand from abroad in the near-term.

The Pound fell as much as 3.5% against the Euro yesterday and the UK currency looks 'oversold' to a degree, the pace of the decline is showing very few signs of subsiding as investors look at the aggressive actions of the U.S Federal Reserve early this week and believe the Bank of England will follow.

The Pound also came under renewed selling pressure versus the Dollar, dropping 0.9% on the session, as the abysmal tone of UK fundamentals and the increasing prospect of another large cut in borrowing costs continues to weigh on sentiment and will probably push the Pound even lower before the turn of the year.

A former member of the MPC, Charles Goodhart, said yesterday that Mervyn King should exercise "aggressive" policies to combat the economic slump and also urged the governor to approach next year with "courage and flexibility" to do whatever is necessary in bringing the economy of the worst recession since the 1970s.

It could be argued that the recent trend means that the Pound is more at risk among the major currencies as the ongoing financial crisis forces central banks globally to follow the Fed's dramatic example but the European Central Bank have publicly expressed unwillingness to drop the benchmark rate lower than 2.0% as the monetary easing cycle draws to a premature end.

The Euro is rallying strongly against the Dollar and the incredible appreciation versus the Pound is showing few signs of peaking as Europe's inflation rate fell the most in almost twenty years last month as oil prices continued to plummet and provided the ECB with further scope to cut interest rates beyond the current 2.5%.

The President of the Central Bank, Jean-Claude Trichet, said yesterday that there is a limit to how far the ECB are prepared to cut interest rates even as the recession takes hold and inflationary pressures moderate from 3.2% in October to just 2.1% last month, the biggest monthly drop since records began in 1991.

The sustained drop in commodity prices and a deteriorating economic climate raised concerns about the emergence of deflation but the ECB has seemingly discounted that threat, saying that a slowing of price increases is more likely rather than a period of declines.

The Dollar traded close to the lowest level in 13-years versus the Yen yesterday, while the U.S currency also slumped to the weakest versus the Euro since September as the Fed's decision to cut interest rates to between zero and 0.25% reduces the appeal of holding U.S assets.

The greenback also plunged against a basket of currencies and surprisingly failed to take advantage of broad Sterling weakness as long-term treasury yields fell and U.S stocks declined amid speculation that the Fed is running out room to cut interest rates and may have to begin a period of quantitative easing as a last resort to stimulate the economy.

Data Released 18th December