Fears of a recession in the UK intensified yesterday as GBP fell hard through the session. The close saw an all-time low against the euro and a 6 year low against the US dollar. The Bank of England Inflation Report was always going to be the main bit of news yesterday but its shockwaves were much more violent than most anticipated.

Mervyn King’s assessment of the UK economy’s prospects was somewhere short of disastrous although his assertion that ‘ a pound drop may be a helpful part of rebalancing’ allowed the market to dump sterling in increasingly large tranches as the day went on. We had forecast this dip on GBP/USD and now subsequent rate cuts by the MPC over the coming months are all but a certainty we believe that interest rates could dip below the 1.5% by February. This in concert with fiscal loosening by the Government is seen as an appropriate measure in these ‘extraordinary circumstances’.

We were worried also yesterday about the CPI predictions for the upcoming 2/3 years and whether we would see CPI dip below 1%; this is now being forecast by the MPC for the end of 2010 with deflation, falling prices and stagnant demand, not being ruled out. This month’s CPI figure is due next week.

Sterling was not alone in its beating as global equity markets too had a shocker. Bourses fell by an average 5% over the course of trading as risk aversion increased in light of a volte face by Hank Paulson, the US treasury secretary. The Troubled Assets Relief Programme, which caused so much wrangling in Congress, will not be used for its primary purpose of buying up toxic mortgage debt and instead be used for buying stakes in the banks themselves. Paulson’s rationale is that that this will help alleviate choked credit conditions. This may be the first step to bailing out General Motors; the car giant is circling the drain and President Elect Obama will be looking for a deal to uphold promises made to labour unions during his Presidential campaign.

While I have been typing this German GDP for the 3rd quarter has been released and it confirms that Europe’s largest economy is in its first recession for 5 years as exports slow in light of the continual euro strength. Other news today includes the usual Thursday jobless figure from the US but we expect further movement from credit, stock and debt markets to influence increasingly.

 Please feel free to contact me (jeremy,cook@worldfirst.com) if you have any questions or thoughts regarding these updates or if you are interested in a particular event in the calendar. If you would like to discuss your foreign exchange requirements, please contact our:

Corporate Foreign Exchange Team on 020 7801 9050 or our Private Client Currency Exchange Team on 020 7801 9080.

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Disclaimer: The above comments are only our views and should not be construed as advice. You should act using your own information and judgement. Although information has been obtained from and is based upon multiple sources the author believes to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute the author’s own judgement as of the date of the briefing and are subject to change without notice.

Any rates given are “interbank” i.e. for amounts of £5million and thus are not indicative of rates offered by World First for smaller amounts. E&OE. Definitions of jargon/market terms can be found in our Glossary of Foreign Exchange Terms.

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