One of the pitfalls of forex blogging (or all financial reporting for that matter) is that it’s inherently after-the fact. In other words, any information about the past – while relevant – is inherently useless, since it has theoretically already been priced into the asset (or currency in this case). Before I begin my post on the Pound’s recent decline and the factors that wrought it, then, I wanted to offer the caveat that in analyzing past events, we must simultaneously look to the future.

Anyway, for anyone watching the Pound Sterling over the last month, its performance has been startling. It is down 7.5% for the year already (we’re only in March!), and has fallen 12% from its August peak of 1.70 USD/GBP. This represents an unbelievable about-face, as the Pound spent much of 2009 floating upwards following its lows from the credit crisis.

What’s behind the decline? In short, economics and politics, or more precisely, the junction of economics and politics. As the British economy began its recovery from recession, analysts began to turn their attention to UK government finances. Another way of looking at this would be to say that analysts have shifted their gaze from the positive effect of government intervention (i.e. economic recovery) to the many lasting negative effects. Inflation and government solvency, of course, are the two most pernicious of the bunch.

The Bank of England’s quantitative easing program was comparable to the Fed’s program in relative terms, and in the aftermath of all of that money creation, inflation is slowly creeping up. The government’s free spending also contributed, and now, so is the sinking Pound, as prices for commodities and other imports are rising fast in local currency terms. Speaking of government spending, the UK government budget deficit is projected at 12% for 2010, slightly higher than 2009. You can see from the chart below that budget deficits are forecast to remain large for the next few years. Expectations are so low, in fact, that a reduction in the deficit to 3% of GDP by 2014-2015 would be viewed as a victory.

Naturally, the UK government feels some pressure to reduce its deficit, both for the sake of financial solvency and to control inflation. The problem is that an election must be called before June, and until then, there is natural pressure to continue operating the money printing presses 24/7 in order to appease the voting public. The same goes for the Bank of England; it can’t be expected to tighten monetary policy and/or reverse quantitative easing until after the election.

I’m not going to pretend that I understand British politics, but from what I’m hearing, it seems the problem is that the election polls are now very close. Previously, a major victory by the Conservative Party was seen as inevitable, and this was viewed positively by financial markets because of the expectation that they would rein in spending. Recently, the incumbent Labour Party has closed the gap, to the extent that a hung Parliament is now a likely outcome. This would be even less desirable than an outright Labour victory, because the sharing of power would make it unlikely that reforms of any kind would be enacted. With regard to forex, some have posited an inverse correlation between the rising popularity of Labour and the falling Pound.

With the crisis in Greece still unresolved, analysts are also making comparisons to the UK. Some have suggested that if Greece were to receive a bailout, then, investors would turn their attention to the UK, whose finances are in equally bad shape. Without the protection of the Euro, the Pound would be open to speculative attack. On the other hand, that the (declining) Pound is independent from the Euro could become in advantage, if it boosts exports.

Going forward, it’s difficult to make any predictions until after the elections and/or the government makes a firm commitment to reduce spending and lower its deficit. Some analysts think that regardless, the Pound is doomed to continue falling, perhaps all the way to the $1.40 mark. Others see the current decline as the “darkness before the dawn.” As I noted in the introduction to this post, the latter could certainly be right. Besides, most of the uncertainty has probably already priced in. While most of the factors currently weighing on the Pound are bearish, some contrarian investors might see this as a good opportunity to buy. And who’s to say they’re wrong?

Since the emergence of the debt crisis in Greece, UK policymakers have been once again patting themselves on the back for not joining the Euro. Otherwise, they would currently be in the same awkward position as France and Germany, whose economic might underpins the entire Eurozone and are wondering about if and how they should lend their support to Greece. Given that the Pound has fallen at an even faster clip than the Euro in recent weeks, however, it seems investors don’t share their sense of complacency. What gives?

One might be inclined to posit that the Pound is falling for reasons unrelated to Greece and the travails of the EU. After all, most of the economic data emanating from the UK these days isn’t exactly positive. GDP grew by an abysmal .4% in the fourth quarter of 2009, and the Bank of England, itself, has revised is 2010 projections down to 1.5%. In addition, inflation is creeping up and short-term rates remain low, such that real interest rates (and by extension, the carry associated with holding Pounds) in the UK are effectively negative.

While this alone would be grounds for selling the Pound, a cursory glance at GBP/USD and EUR/USD cross rates reveals that the Pound and Euro are falling in tandem. In my eyes, this implies that investors have impugned a connection between the situation in the EU (i.e. Greece and the other “PIGS” economies) and in the UK. And no wonder, since UK debt levels are as worrisome as any other country, developing or industrialized. Its budget deficit is 13%, slightly higher than in Greece. Private debt is estimated at £1.5 Trillion, or £60,000 per household, which is the highest (in relative terms) in the world. “Then there’s the trillion-pound bank bail-out, the trillion-pound public-sector pension liability, the trillion-pound public debt and those off-balance-sheet private finance initiatives schemes. If you add up Britain’s real liabilities you find that the UK is heading for a total debt burden of several times its GDP,” summarized one analyst.

Of course, this is nothing new. I, myself, have written about the looming UK debt crisis on previous occasions. While such a crisis is still years away, the turmoil in Greece is causing investors to cast fresh eyes on the similarities and differences with the UK, and they clearly don’t like what they see. On the one hand, Britain’s monetary independence means that it can deflate its debt (by simply printing more money), unlike Greece, whose membership in the European Monetary Union precludes such a possibility. While this means that Britain is ultimately less likely to default on its debt, it makes it more likely that it its currency will have to weaken at some point in the future, so that its liabilities remain manageable. Bond investors, then, are right to prefer UK Bonds, but currency investors are equally right to shun the Pound in favor of the Euro.

It seems that Britain’s conception of itself is somewhat flawed. While it thinks of itself as akin to France or Germany (and hence, is quite happy not to be an EU member at the moment), the markets seem to think of it as a Spain or Portugal. The implication is that the markets currently believe that the UK would do better if it was a member of the EU than on its own. Of course, that proposition is debatable (and still unlikely), but it’s worth bearing in mind because it’s what investors apparently believe.

As usual, the BOE remains (perhaps willfully) oblivious of all of this. It is mulling an extension of its quantitative easing program, which is supposed to end this month. This program is responsible for an expansion of the money supply equal to 14% of GDP in 2009 alone! Most economists consider it a dismal failure, and it seems to have succeeded only in catalyzing growth in prices (aka inflation) rather than output (aka GDP). “The suspicion is that the UK government and Bank of England is not worried that the pound remains weak in this repositioning of currencies. They may indeed welcome it. There is no immediate appetite for raising interest rates to strengthen sterling and no point making exports harder by strengthening the exchange rate.” They would be wise to bear in mind, though, that while currency depreciation is useful for devaluing existing debt, it can have the unintended consequence of scaring off investors, and make it difficult to fund future debt.

Currency investors may be ahead of them on this one.

I’d like to follow up on my last post (Timing is Everything in Forex, Especially in this Environment) by looking at how to time one specific currency: the Pound. As I noted tongue-in-cheek with the title of this post, timing the Pound will not be difficult, since it is likely headed downward in both the short term and long term.

In the short-term, the Pound will be crippled by the UK’s economic woes: “Britain is the last of the big G20 countries still to be mired in recession. Its GDP has shrunk by 4.75% this year, far more than the 3.5% reckoned likely in April.” There’s no reason to pore through the economic indicators, since all signs suggest that it won’t be until 2010 that Britain returns to positive growth.

Of primary concern to forex markets, however, is not economic growth (or lack thereof, in this case), but rather how this will effect the decision-making of the Bank of England (BOE). To no surprise, the BOE announced yesterday that it would maintain its benchmark interest rate at .5%, and its liquidity program at current levels. It didn’t give any indication, meanwhile, that monetary policy on either of these fronts would change anytime soon.

Thus, Britain could conceivably replace the Dollar as one of the preferred funding currencies for the carry trade. While the Fed is also in nu hurry to hike rates, the US economy has already emerged from the recession, which means that regardless of when it tightens, it will almost certainly be before the Bank of England. Unless the BOE pulls an audible then, timing the Pound will be fairly straightforward; the currency should begin to slip as soon as its peers begin to raise rates. Some analysts expect that the Pound will decline to $1.50 per Dollar within the next six months.

Over the long-term, the narrative governing the Pound is naturally more uncertain, but still straightforward. To try to dig itself out of recession, the government has spent itself well into the red, to the extent that this year’s budget deficit is forecast to be a whopping 12.6%, Next year could be even worse. The government has implemented a couple of half-baked measures designed to curb the deficit, but most of these are aimed at increasing tax revenue (which is futile during a recession), rather than trimming spending. While ratings on its sovereign debt were recently affirmed at AAA, Moody’s has warned that a downgrade in the next few years is not inconceivable.

So there you have it. As far as I’m concerned, the only question of timing, vis-a-vis the British Pound, is when the decline will begin. My guess is sometime in the beginning of 2010, when investors start getting serious about projecting near-term interest rate differentials, and pricing them into exchange rates. While most forex traders aren’t thinking this far down the road, it’s also comforting (for bears, not bulls, obviously) that the long-term fundamentals point to a sustained decline in the Pound. Whereas the Dollar could jump up before heading back down – making timing a crucial skill – the Pound will probably just head down.

Setting a triumphant tone against both the U.S. dollar and the Euro, the British pound gained significantly in the overnight over speculation of – yep, you guessed it, interest rates.  Although there is plenty of evidence of short covering from the previous sell off in recent days, the tone of momentum reeked of carry trade bets made on recent comments made by Bank of England Governor Mervyn King and a rather dovish minutes report.

According to this morning’s Bank of England minutes, central bankers voted unanimously to hold interest rates at a record low of 0.5 percent.  As “recent developments were not sufficiently compelling to justify” a change in current monetary policy, the BoE saw nothing in justifying any rate increases as well as an expansion of the Quantitative Easing program.  The plan is currently set at 175 billion pounds.  Although the report was stable and expected, any further momentum higher in the currency will likely be dependant on the November 5^th meeting.  During this time, central bankers will review growth forecasts in order to better assess the current economic situation.  Forecasters have already noted that the UK economy may have very well exited the recession back in the third quarter with a 0.7 percent tick higher.  However, any visible weakness in the GDP figure may prompt another 25 billion pound increase in the asset purchase program, giving the underlying pound a bearish tone.

Notably, Governor Mervyn King was quoted in an individual article saying that interest rates in the U.K. will likely rise in the future “at some point”.  He also cautioned that “it would be wise to take this into account”.  Not only does this signal a potential shift in monetary policy, but also a shift in personal attitude as it seems that the UK monetary authority may see some signs of a stable economic foundation.  The statement also helps to fodder a sentiment that interest rates may be set to rise in the broader market, leaving the U.S. as the last player that will consider the option.  On this ticket, the British pound skyrocketed higher from the 1.6384 close yesterday in New York, to trade as high 1.6598.  Although a medium term pullback is highly likely, the sentiment may give plenty of support for anti-dollar buying throughout the day.

A theme in forex markets (as well as on the Forex Blog) is that as the Dollar has declined, virtually every other asset/currency has risen. The rationale for this phenomenon is that the global economic recovery is boosting risk appetite, such that investors are now comfortable looking outside the US for yield. However, this market snapshot may have to be tweaked slightly, in accordance with a recent WSJ article (Sterling Looks Ready to Join the Sick List).

According to the report, “Similar to how investors sorted good banks from bad banks earlier this year, foreign-exchange buyers are starting to sort strong currencies from weaker currencies. The pound appears to be joining the dollar in the weak camp. Both countries have near-zero interest-rate targets, an aggressive policy aimed at boosting the economy, and yawning deficits.” In contrast, the article continues, the Yen and the Euro have risen, as have so-called commodity currencies.

While there’s no question that British economic and forex fundamentals are abysmal, it’s a bit hard to understand why the markets are picking on the Pound now. After all, the Euro, Swiss Franc, and Yen, for example, are plagued by some of the same fundamental problems: growing national debt, sluggish growth, low interest rates, etc. Investors can borrow in Yen nearly as cheaply as they can borrow in Dollars or Pounds, and the Bank of Japan is likely to keep rates low at least as long as the Bank of England (BOE), if not longer. Meanwhile, price inflation remains practically non-existent, which means that any capital that investors stash in the UK should be safe.

Perhaps, then, investors are zeroing in on the BOE’s Quantitative Easing program, which is the point of greatest overlap with the US Dollar. Relative to GDP, both currencies’ Central Banks have spent by far the most of any industrialized countries, in pumping newly printed money into credit markets. The BOE, in particular, is actually thinking about expanding its program. At a recent meeting, Mervyn King, Chairman of the Bank, led the opposition in voting for a 15% expansion, but was voted down by a majority of the bank’s other members. “The ‘next decision point‘ will be the Nov. 5 meeting,” said a former Deputy Governor of the Bank, at which point “Bank of England policy makers will consider expanding their bond purchase plan….on concern the economy’s recovery may be a ‘false dawn.’ ”

The government meanwhile has demonstrated a certain ambivalence when it comes to the program. The head of the UK Debt Management Office indirectly encouraged the BOE to continues its purchases of bonds, for fear that stopping doing so could cause yields to skyrocket and make it difficult for the government to fund its activities. “A rapid sell-off could create a downward spiral of gilt prices which would make life harder for both it and the DMO.” On the other hand, one of the leaders of Britain’s conservative party – which is projected to take office after next year’s elections – has criticized the program on the grounds that it will lead to inflation.

From the BOE’s standpoint, it’s a no-win situation. Continue the policy, and you risk inflation and further invoking the ire of politicians. Wind it down, and you could tip the economy back into recession. For better or worse, it seems the BOE will err on the side of the former: “If we stopped supporting the economy now it would crash. Every country in the world and just about every informed commentator is saying the same thing. The job is not finished.” Given that inflation is projected to hover around 0% for the next two years, the BOE still has some breathing room.

As for the charge that the surfeit of cash flowing into markets is weakening the Pound, ‘So be it,’ seems to be the attitude of Mervn King who suggested that, “The weaker pound was ‘helpful’ to efforts to rebalance the British economy toward exports.” While he backtracked afterward, it still stands that the BOE hasn’t made any efforts to stem the decline of the Pound, and is at best indifferent towards it.

Regardless of where the BOE stands, the Pound is not being helped by the weak financial and housing sectors, which during the bubble years, comprised the biggest contribution to UK growth. Exports are weak, and domestic manufacturing activity has yet to stabilize. As a result, “The British economy will contract 4.4 percent this year before expanding 0.9 percent in 2010, the International Monetary Fund predicts.”

Objectively speaking, then, it makes sense to call the Pound sick. Still, many other currencies are just as sick. I guess the perennial lesson is that in forex, everything is relative.

A busy morning in New York as U.S. employment indicators and announcements by both the ECB and BOE are setting the tone for the market.  It seems that U.S. dollar weakness continues to prevail, given the momentum from last night’s positive Australian employment report and further views that an economic recovery, in the global sense, is in the works.  As a result, buyers have pushed the Euro higher to trade $1.4765 against the U.S. dollar with the British pound breaking the $1.6000 figure to trade at $1.6052.

U.S. initial jobless claims surprised the masses as first time claimers of unemployment benefits fell last week to a level not seen since the beginning of the year.  For the week, applications dropped by an impressive 33,000 to 521,000 – significantly lower than the 540,000 that was predicted by analysts.  Today’s weekly Labor Department report conflicts with last week’s non-farm payrolls figure, giving some hope that there is now stabilization in the broader labor market.  Subsequently, the four week moving average has now dropped a haircut below 540,000, setting up for another interesting employment release next month.

As expected both the European Central Bank and the Bank of England have kept their interest rates steady following announcements this morning.  However, key elements have now sparked some speculation to the downside, which may help the greenback gain some traction against both the Euro and pound sterling.

Keeping interest rates at a record low of 0.50%, the Bank of England is likely waiting till November to make any real decisions regarding monetary policy.  Although confidence has edged up slightly, along with some recovery in the housing sector, things haven’t really improved in the UK economy.  Manufacturing continues to place a lag on overall productivity as labor concerns continue to swirl – last print has unemployment in the country soaring to 7.8 percent annually.  The fragility of the economy has now placed even more emphasis on any possible extension of the Quantitative Easing plan.  Already at 175 billion pounds, there is still hope that the plan will be extended another 25 billion in order to pump even more funds into the market in order to prop up the economy.  Such a move will place significant pressure on the British currency as supply will overrun demand.  As a result, look for upcoming economic data to heavily influence the central bank November decision.

European Central Bank members additionally decided to keep to their key benchmark interest rate, citing that current level of interest rates remain “appropriate” for the time being.  This decision is likely to remain for an extended period given the fact that economic growth seems choppy at best for the region.  Production has improved slightly, contrary to overall labor markets which continue to remain weak.  Should policy makers increase lending rates to soon, risks remain abound that current nascent growth will be choked off.  As a result, the ECB will likely continue to work with lenders to free tight lending markets and hope that firm stabilization will come sooner than later.  Nonetheless, the underlying currency continues to be well supported against the U.S. dollar on worrisome economic fundamentals in the world’s largest economy.

The release of minutes from this month’s Bank of England monetary policy meeting headline the economic calendar in European hours. The announcement itself produced no surprises with interest rates left at 0.5% and the magnitude of quantitative easing unchanged at 175 billion pounds. Just five days later, however, BOE chief Mervyn King gave resoundingly dovish testimony to House of Commons Treasury Committee, saying poor credit growth remains a direct drag on demand and revealing that policymakers are considering cutting the interest rate they pay on bank deposits to encourage idle reserves to be channeled into lending. The latter comment in particular sent the British Pound tumbling, with traders clearly caught off guard as the BOE was seemingly preparing for more, not less, monetary easing despite the recent uptick in leading economic indicators. This creates strong potential for sterling volatility as the markets dissect tonight’s release for any clues on how serious King and company are about the deposit rate idea and when (if ever) such an outcome may be expected. For our part, we speculated ahead of the September 10 rate announcement that the bank was preparing the markets for a change in policy after the asset-buying scheme largely failed to affect lending to the real economy. Indeed, although Mervyn King has said that the BOE was “beginning to see its impact on the supply of broad money,” the M4 measure of money stock grew at an annual pace of just 12.6% in August, the slowest in a year, while central bank’s own data showed net lending shrank for the first time in at least 16 years in July.

Separately, the British Bankers Association’s measure of Loans for House Purchase is set to show that mortgage approvals rose by 40,500 in August, the most since February 2008, hinting at stabilization in the property market. Earlier this week, a report from Rightmove Plc showed that UK house prices fell the least in a year in September, saying “confidence is up, stock is down and the number of people searching is high.” However, as we noted earlier, the rebound may have a hard time retaining traction with consumer sentiment apparently tracking equities and therefore is vulnerable to a (long overdue) correction in risky assets while unemployment continues to rise, with a survey of economists polled by Bloomberg calling for the jobless rate to top 9% next year.

Turning to the continent, a handful of Purchasing Manager Index releases are expected to come in broadly positive. In Germany, the manufacturing sector is expected to expand for the first time in 14 months while the pace of expansion in the service industry picks up to the fastest since April 2008. Manufacturing will likely continue to shrink in the Euro Zone as a whole but the rate of decline is set to moderate to the slowest since the sector first began to contract in May last year. The improvement can likely be attributed to the continued rebuilding of inventories after firms cut production and exhausted their stocks of goods last year and through the first quarter of 2009 amid the global economic downturn. Still, Industrial New Orders are expected to shrink -25.9% in the year to July, suggesting the pace of demand contraction will remain within the range noted since November of last year.

Asia Session Highlights

New Zealand’s Gross Domestic Product unexpectedly added 0.1% in the three months to June, snapping five consecutive quarters of losses. Economists were forecasting a -0.2% result ahead of the release. The economy shrank -2.1% from a year before, less than the expected -2.6% decline. The Reserve Bank of New Zealand was among those calling for a contraction when Governor Alan Bollard said the bank expected to “keep [interest rates] at or below the current level…until the latter part of 2010” at the monetary policy announcement earlier this month, and traders seemingly took today’s release to mean the time table will now accelerate. Indeed, a Credit Suisse gauge of priced-in rate hike expectations for the coming year jumped 13 basis points to a record high and the New Zealand Dollar surged to a fresh 2009 high against a trade-weighted basket of top currencies.

The US Dollar Index (an average of the greenback’s value against six major counterparts) spiked to a fresh yearly low after the Chinese central bank’s deputy governor Hu Xiaolian wrote in a paper posted on the G20 website ahead of the group’s summit in Pittsburg this week that the current crisis was due in part to the Dollar’s role as global reserve currency. Hu, who is also the former director of China’s foreign-exchange authority, went on to say that the world stands at risk of an asset bubble and potentially another crisis akin to the current one if the global monetary system is not changed.

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The UK labor market is likely to show continued weakness as Jobless Claims rise by 25,000 in August, pushing the unemployment rate (known in the UK as the Claimant Count) to a 12-year high at 5.0%. More of the same is expected going forward: a survey of economists polled by Bloomberg forecasts the jobless rate will top 9% next year. Continued job losses will trim incomes and discourage spending, threatening the economy’s ability to sustain recent improvements and potentially adding to selling pressure on the British Pound after yesterday’s damaging comments from Bank of England Governor Mervyn King. For our part, we sold GBPUSD at 1.6617.

In the Euro Zone, the Consumer Price Index is set to show inflation shrank at an annual pace of -0.2% in August, confirming initial estimates. To that effect, the reading may already be priced into the exchange rate and, barring unforeseen revisions, looks unlikely not produce a meaningful response from the currency markets. The longer-term view is not encouraging for the single currency, however: while the August reading amounts to a slight improvement from the previous month’s -0.7% contraction, the bottom line is that prices are set to decline for the third consecutive month, threatening to bring economic growth to a virtual standstill if expectations of lower prices in the future encourage consumers and businesses to perpetually delay spending and investment. This leaves the door open for traders to punish the Euro in the months ahead if it becomes clear the currency bloc is heading for a long-term period of sub-par performance and low interest rates.

Swiss Retail Sales are expected to add 0.7% in the year to July, a reading slightly lower than the previous month’s 0.9% result. Shrinking prices have boosted consumers’ purchasing power in recent months, encouraging spending, but continued deflation threatens to work against retail activity if it translates into entrenched expectations of even lower prices in the future. Rising unemployment is also setting up to be a formidable obstacle: the jobless rate surged to 3.8%in August, the highest in over three years, and is expected to hit 5% next year.

Asia Session Highlights

Australia’s Westpac Leading Index added 1.1% in July, rising to the highest level in seven months. The index fell -1.8% from a year ago, the smallest decline since October 2008. The metric seeks to forecast how the economy will perform over the coming three to nine months. Westpac chief economist Bill Evans said the upswing in the index over recent months points to “a significant improvement in [Australian economic] growth prospects in 2010.” However, Evans noted that the bank does not expect future growth will be “sufficiently robust” to warrant to raise interest rates before next February, reinforcing the cautious tone of the minutes from September’s RBA monetary policy meeting.

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A revision of the second-quarter UK Gross Domestic Product is set to confirm that the economy shrank 0.8% in the three months to June to bring the annual growth rate to -5.6%, the worst in at least 53 years. Barring an unexpected, large revision in the headline figure or any of the key components (in particular the Private Consumption reading), the outcome is unlikely to produce much of a reaction in the currency markets having already been priced into the exchange rate. Indeed, the market seems focused more on the Bank of England’s dovish posture despite surface-level improvements in economic data: a trade-weighted index of the Pound’s average value topped out on 08/05, the day before the last rate decision, and has been trending lower ever since; a Credit Suisse index gauging traders’ 1-year BOE rate hike expectations (as derived from overnight index swaps) topped out on the very same day.

Turning to the continent, Euro Zone Consumer Confidence is expected to rise for the fifth straight month to print at -21 in August, up from -23 in the previous month. The metric closely tracks a Morgan Stanley index of Euro Zone stock performance; indeed, the correlation now stands at a formidable 97.7% and has registered above 80% since October 2005. Equities listed on Euro Zone exchanges have added 5.7% so far this month, bolstering the case for an improvement in sentiment. The Euro Zone Business Climate Indicator is likely to follow a similar trajectory: this metric is 95.1% correlated to stock performance in the currency bloc. While these results will offer little by way of new insights, they may offer some additional near-term fuel to continue feeding the rebound in risky assets that began late into the New York trading session. The longer-term outlook is far more ominous, however: unemployment stands at 9.4%, the highest in a decade, while loans to Euro Zone businesses and households grew just 0.6% in July, the lowest since records began in 1991. Clearly, private demand can’t grow without the ability to earn or borrow money, making any rebound beyond the fleeting effects of government stimulus a distant prospect.

Asia Session Highlights

Japan’s labor market continued to disappoint in July as the Jobless Rate rose to a greater-than-expected 5.7%, a 33-year record high, while the ratio of available jobs to seeking applicants unexpectedly dropped to a fresh all-time low of 0.42. Looking ahead, a survey of economists conducted by Bloomberg suggests the pace of job losses will continue to accelerate at least through the second half of next year. This points to continued weakness in consumer spending as layoffs weigh on disposable incomes. Indeed, Household Spending fell -2.0% in the year to July, four times worse than forecast.

The economic outlook for the world’s second-largest economy was made all the more ominous as the Consumer Price Index fell -2.2% in the year to July, marking the sixth consecutive month in negative territory and threatening to send Japan spiraling back into another “lost decade” of deflation-fueled stagnation as consumers and businesses expecting lower prices in the future delay spending and investment, encouraged to perpetually wait for the best possible bargain.

In the UK, GfK Consumer Confidence disappointed in August, holding flat at -25 to show that pessimists among those polled for the survey outnumbered the optimists by the same margin for a third consecutive month, upsetting expectations of an improvement to -24. Expectations of economic conditions for the next 12 months and the propensity to commit to major purchases both deteriorated; the former for the first time since April. On the other hand, a gauge of saving intentions rose for the seventh consecutive month. A statement accompanying the release noted that, “While UK consumers are still cautious about the economy, they are less pessimistic than this time last year.”

The Bank of China Ltd, the country’s third-largest lender by assets, said it plans to slow credit growth in the second half of the year. The news reinforces the government’s efforts to rein in lending and may weigh on risky assets considering the market’s recent focus on China as the poster-child of recovery from the global downturn.

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From trough to peak (March 10 – August 5), the British Pound appreciated by a whopping 25%, its strongest performance in such a short time period since 1985. The Pound has fallen mightily since then, and most factors point to a continued decline.

On almost every front, the Pound is being buried under a mound of bad news. Its economy is currently one of the weakest in the world, especially compared to other industrialized countries; on a quarterly basis, its economy is contracting at the fastest rate in over 60 years. Forecasts for UK economic growth are commensurately dismal: “Median estimates in Bloomberg economist surveys see the U.S. shrinking 2.6 percent in 2009 and expanding 2.2 percent in 2010, compared with a 4.1 percent contraction followed by 0.9 percent growth in the U.K.”

In addition, the only signs of growth appear to be a direct result of government spending, a notion that is evidenced by the latest retail sales and housing market data, both of which remain at depressed levels. “People are worried that the global recovery is based on unsustainable government spending and numbers like this from the U.K. only encourage those fears,” said one analyst in response.

While government spending, meanwhile, is arguably a valuable tool for stimulating economic growth, analysts worry that it might be reaching the limits of feasibility. “The Office for National Statistics said the budget shortfall was 8 billion pounds ($13.2 billion), the largest for July since records began in 1993.” On an annual basis, the government is planning to issue 220 Billion Pounds in new debt, to fund a budget deficit currently projected at 12.4% of GDP, easily the largest since World War II.

The Bank of England’s prescription for the country’s economic woes are also provoking a backlash. When the Bank announced at its last monetary policy meeting that it would expand its quantitative easing program by 50 Billion Pounds, the markets were aghast. Imagine investor shock, when the minutes from that meeting were released last week, revealing that 3 dissenting governors were agitating for an even bigger outlay! No less than Mervyn King, the head of the bank, “push[ed] to expand the central bank’s bond-purchase program to 200 billion pounds ($329 billion).

Given the dovishness that this implies, combined with an inflation rate that is rapidly approaching 0%, investors have rightfully concluded that the Bank is nowhere near ready to raise interest rates. “The market was expecting the BOE to be one of the first to hike rates. It’s becoming clear that’s unlikely, undermining the pound,” conceded one economist. Interest rate futures reflect an expectation that the Bank will hold rates at least until next spring. LIBOR rates, meanwhile, just touched a record low.

As a result, forecasts and bets on the Pound’s decline now seem to be the rule. “BNP Paribas…predicted another 9.3 percent decline to $1.50 in 12 months…After the Bank of England decision, pound futures and options speculators became more pessimistic as weekly bets favoring sterling fell more than 32 percent, the most since November.” In short, “Sterling is over-priced at current levels.”