According to a study by Ernst & Young The number of profit warnings by UK-listed companies hit a seven-year high in 2008. Its study of 2008 found that the house building and car industries were most affected, with 60% of listed firms in both sectors having warned on profits. Not good news for the Pound. Indeed, warnings by firms on the London Stock Exchange increased by 17% compared to the previous year. Indeed, Keith McGregor form E&Y said ‘It would be difficult to predict anything other than a deteriorating economic climate in the UK over the coming months.’
UK Manufacturing
UK Manufacturing output fell at its fastest pace since 1981 in November showing the problems currently in the economy. The Office for National Statistics confirmed that output fell as much as 7.4% compared to the previous year and a fall of 2.9% against the previous month. Although the Bank of England cut rates to 1.5% on Thursday, the lowest in 315 years, many economists believe that interest rates need to be cut further in order to halt the decline.
Indeed, if interest rates are cut again next month we could see more problems for the Pound. James Knightley, economist from ING said ‘industrial output has now fallen for nine straight month, which is the worst run of data since 1981, so the pressure for further stimulus will continue. Furthermore, although the weak Pound has potentially helped to make UK goods more competitive on the international market it is not a good time to be in the manufacturing industry. Last week Nissan announced it was cut around 1200 job at its plant in Sunderland. Also, china and glass group Waterford Wedgwood went into administration.
Interest Rates
Interest Rates in the UK were cut on Thursday by 50 basis points in an attempt to stave off recession. However, many business leaders wanted a larger cut and some economists believe the Bank must go to 0% to avoid a prolonged period of recession. One of the main reasons why the Bank did not cut rates by a larger amount was to stop the Pound from falling too quickly. If rates had been cut by 1% we could have seen Sterling plummet. Indeed, we saw a small recovery in the afternoon following the announcement as it came out better than some had expected.
European Inflation Figures
Low Inflation figures released on Tuesday last week helped to give Sterling a lift against the single currency. Inflation fell by more than expectations to 1.6% compared to the target figure of 2%. The lowest figure is over two years means that the ECB now has a chance to cut interest rates when it meets on Thursday afternoon. Typically the ECB has been slower than both the US and UK when it comes to moving interest rates but in the current climate it may be necessary. However, although we saw the GBP-Euro exchange rates increase by 8% since the turn of the year the movement appears very short-lived.
Many economists have already priced in a cut for the ECB and even if they do cut rates by half a percent they will still be higher and therefore more attractive than both the US and the UK.
So with the likelihood of more firms going into administration this year and the UK seemingly set for a long period of recession the outlook for Sterling looks bleak at best so if you do have an upcoming currency requirement please contact your account manager to discuss your options.
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