Sterling hits 5 year low

Sterling dropped below $1.60 for the first time in 5 years in anticipation of Friday’s Preliminary GDP figures. The report could show that the British economy contracted in the third quarter of the year, indicating that the U.K is heading towards recession. The pound headed for its largest weekly fall against the greenback in 16 years before a report that is expected to show Gross domestic product contracted 0.2% in the three months through September. Pressure was put on Sterling earlier in the week as Bank of England Governor Mervyn King said he expects a ``sharp and prolonged slowdown'' in demand.

``We expect the currency to continue underperforming the greenback,'' a London-based currency strategist for UBS AG, wrote in a report. ``King warned that Britain's economy is probably entering its first recession in 16 years and before the government stepped in, the U.K. banking system was closer to collapse than at any stage since World War I.''

There is speculation that the Bank of England will cut interest rates by as much as three quarters of a percent by the end of the year in an attempt to boost the economy. GBP/USD was trading at 1.5510 at 8.50am GMT

On Friday the yen hit a 13-year high against the dollar as fear over global recession encouraged traders to un-wind carry trades, in which purchases of higher-yielding assets are funded with the Japanese currency. The yen also hit the strongest level in 6 years against the euro after a number of European countries requested at least $20 billion of emergency support from the International Monetary Fund.USD/JPY was trading at 93.81 at 8.50am GMT

Today stateside a report is expected to show that home resales rose in September, supported by a drop in prices. Purchases of existing homes rose 0.8 per cent last month to a 4.95 million annual rate, slightly above the 4.94 million average so far this year. ``Banks are foreclosing and selling homes at fire-sale prices and that is driving this,'' said, an economist at IHS Global Insight in Lexington, Massachusetts. ``A jump in existing sales would be a one-month thing -- they'll continue falling.'' The increase in sales due to lower prices may not last however, as banks are reluctant to provide financing on concern that foreclosures will affect profits and push down values more. Purchases fell to a 4.86 million rate in June, the lowest level in 10 years and down 33 per cent from record levels of September 2005.

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