Sterling punished as UK recession deepens

By Esther Bintliff

Published: December 9 2008 11:50 | Last updated: December 9 2008 15:10

Sterling slumped against the dollar and the yen on Tuesday, punished by a fresh onslaught of grim economic data that further exposed the depth and severity of the UK recession.

October industrial output data revealed that UK production dived by a far worse-than-expected 1.7 per cent month-on-month, increasing the likelihood of further interest rate cuts in January. Disappointing retail figures intensified the general gloom, with total retail sales declining year-on-year in November for a second consecutive month.

Simon Denham, managing director of Capital Spreads, said: “Sterling is once again the whipping boy on the exchanges. The fact that [the currency] keeps slipping from ledge to ledge with no real attempts to step ‘up’ does not bode well for longer term stability. Virtually every chart you look at shows the pound in long term decline.”

Against the yen, the pound dropped 1.7 per cent to Y136, while sliding 0.4 per cent against the euro at £0.8727.

But the euro was also under pressure following the previous session’s gains, falling 0.8 per cent against the dollar at $1.2847, despite an unexpected improvement in German investor confidence.

Germany’s ZEW institute said its “economic sentiment” indicator rose by 9.5 points to minus 46.1 in December, from minus 53.5 in November. But the index was still far below its historical average of 27.1 points.

Jennifer McKeown, at Capital Economics said: “December’s surprise increase in German ZEW investor sentiment brings very limited comfort. The fact that the index is still deeply in negative territory shows that many more investors expect the economy to deteriorate further over the next six months than think that conditions will improve, which is saying something given the weak starting point.”

The Canadian dollar extended early losses against its US counterpart, after the Bank of Canada surprised the markets by slashing interest rates to a 50-year low of 1.5 per cent. The central bank’s rate cut of 75 basis points beat the consensus forecast for a 50bp reduction and was accompanied by a bearish statement announcing that the Canadian economy had entered recession. Following the news, the loonie tumbled 1.7 per cent against the US dollar to C$1.2730, from C$1.2640 just before.

Overall, the slight easing of risk aversion in currency markets seen in the previous session was all but reversed, with investors retreating to the relative safe-havens of the US dollar and the Japanese yen. The dollar strengthened against most major currencies except for the yen, against which it slipped 0.4 per cent to Y92.50.

Against the euro, the yen added 1.2 per cent to Y118.78, while climbing 2.3 per cent against the high-yielding Australian dollar to Y60.29 and 1.7 per cent against the New Zealand dollar to Y49.97.

Copyright The Financial Times Limited 2008