Raphaels Bank Morning Commentary 28th August

publication date: Aug 28, 2008

The Pound continues to slide against both Euro and US Dollar.

The pound fell to its lowest level in four months against the euro after a report showed house prices fell for a ninth month. The survey from Nationwide Building Society, the nation's fourth-biggest mortgage lender, showed the average value of a home dropped 1.9 percent in August, exceeding economists estimates for a decline of 1.5 percent. Loans approved for house purchases slumped 65 percent last month, the British Bankers' Association said yesterday. The pound has fallen as low as 1.2405 against the euro by 7:10 a.m. this morning, the lowest since April 17, from 1.2464 yesterday.

The pound also slid to a fresh two-year low against the U.S. dollar on Wednesday in thin trading, pressured by concerns about a slowing economy that could force the Bank of England to cut interest rates. Sterling fell to $1.8286 at one point yesterday, the lowest since July 2006. The pound has dropped from $2.0153 hit just over a month ago, and was on track to post its weakest monthly performance against the dollar since 1992 when it sank 12 percent. This morning the pound was little changed at $1.8348, showing a decline this month of 7.5 percent. The dollar was supported by data that shows some US industries are proving resilient to economic slowdown, indicating that growing demand from abroad is helping companies weather a slump in domestic spending.

The main question investors in the British pound have is "When is the Bank of England (BOE) going to cut rates?" At this point, it's not so much a matter of if, but when. One of the key drivers behind this question has been the steady decline of the U.K. housing market. Traders are piling in on the short side at present due to the growing concern the Bank of England will reduce interest rates by as much as 1.5% by the end of the year. The deepening housing slump is expected to continue to put downside pressure on the Pound. 

Data out today includes German Unemployment for July (07.00 BST), UK CBI distributive trades report for August (11.00 BST) and the preliminary estimate of US GDP for Q2.

Have a nice day!