Sterling falls as CBI says the Economy is set for a severe slump

The pound fell after the Confederation of British Industry said the U.K. economy will contract at almost twice the pace previously forecast this year. The British currency dropped against the euro and the dollar as the CBI, the biggest U.K. business lobby, said gross domestic product will contract 3.3 percent, the most in almost 30 years, instead of the 1.7 percent predicted in November. The Group of Seven finance chiefs meeting in Rome on the weekend avoided any reference to the weakening pound, which is down 17 percent versus the euro and 28 percent against the dollar. There was “no mention, discussion of the pound” at the G-7 meeting, Callum Henderson, head of global currency strategy, and Thomas Harr, senior currency strategist, at Standard Chartered Plc in Singapore, wrote in a research note today. “This may prove negative for sterling. Euro-pound in particular is likely to bounce on the back of this omission.” The GBP/USD is currently trading at $1.4215 as of 8:30am, GMT.

The yen may weaken 13 percent against the dollar this year as Japanese exporters lose competitiveness and the nation’s economic slump deepens. The decline in Japan’s currency may wipe out more than half its gains from 2008 that were spurred by the flight into haven currencies due to the global financial crisis. The world’s second-largest economy shrank 3.3 percent from the previous quarter, today’s report showed. That compared with the U.S.’s 1 percent contraction and the eurozone’s 1.5 percent decline, which was the biggest in at least 13 years. “There’s no doubt that the economy is in its worst state in the postwar period,” Japan’s Economic and Fiscal Policy Minister Kaoru Yosano said today in Tokyo. “The Japanese economy, which is heavily dependent on exports of autos, electronics and capital goods, has been severely hit by the global slowdown.” The USD/JPY is currently trading at 91.85 as of 8:55am, GMT.

Lloyds Banking Group shares tumbled over 20 percent on Monday as its profit warning on Friday revived concerns it could need more state funds or be nationalised due to deepening problems at HBOS. Lloyds shares were down 13 percent at 53.4 pence after falling as low as 48p. Royal Bank of Scotland fell 6 percent as, like HBOS, it is exposed to the problem commercial real estate sector, while the grim mood spread across the sector and pulled Barclays shares down 6 percent. "Losses from the HBOS book are not surprising and we expect them to push the combined group into a loss for 2009," analysts at UBS said in a note on Monday. "If losses were to accelerate, there is a risk capital could reduce to levels below which the market would have confidence in the group."

Today's Economic Events