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Fundamental Outlook for British Pound: Bearish - 3Q GDP Revised to -0.6% from -0.5% - British Pound Tests Record Low Against Euro

The British Pound continued its move towards parity against the Euro and slid lower against the U.S. Dollar ahead of the New Year, which suggests that investors remain bearish against the currency as market participants widely expect the Bank of England to lower borrowing costs even further in January. Nevertheless, financial uncertainties paired with the ongoing downturn in the housing sector is likely to stoke increased selling pressures for the currency over the near-term as the economic calendar continues to reflect a dour outlook for growth.

The lowest interest rate since 1951 highlights the extraordinary efforts taken on by the central bank, and market participants anticipate policymakers to ease policy further as they do everything possible within their authority to mitigate the downturn in the economy. A Bloomberg News survey shows that 27 of the 38 economists polled anticipate BoE Governor Mervyn King and Co. to lower the benchmark interest rate by 50bp to 1.50% at the January 8th policy meeting. Meanwhile, weakening fundamentals have certainly dragged on the British Pound throughout the second half of the year, and the event risks scheduled for the following week could weigh on the currency as growth prospects deteriorate at a rapid pace. The BoE’s housing equity withdrawals index is projected to fall to -3.3B from -2.8B in the second quarter as a result of tumbling home prices paired with tightening lending practices, while consumer credit is expected to decline to 0.6B from 0.8B in October. As credit conditions remain far from normal, private sector spending, which is one of the biggest drivers of growth, is likely to remain subdued throughout the coming months, and would only heighten the downside risks for growth going forward.

From a technical standpoint, the British Pound is expected to remain range-bound in the week ahead, and should hold major trends against its currency counterparts over the near-term. Accordingly, as investors round-trip their open positions for the year, thin markets are unlikely to impel a drastic shift in trader sentiment, and the Sterling is likely to face headwinds ahead of the event risks scheduled for the coming week.

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The biggest mental hurdle facing newcomers to currencies, especially traders familiar with other markets, is getting their head around the idea that each currency trade consists of a simultaneous purchase and sale. In the stock market, for instance, if you buy 100 shares of Google, you own 100 shares and hope to see the price go up.

When you want to exit that position, you simply sell what you bought earlier. Easy, right? But in currencies, the purchase of one currency involves the simultaneous sale of another currency. This is the exchange in foreign exchange. To put it another way, if you’re looking for the dollar to go higher, the question is “Higher against what?”

The answer is another currency. In relative terms, if the dollar goes up against another currency, that other currency also has gone down against the dollar. To think of it in stockmarket terms, when you buy a stock, you’re selling cash, and when you sell a stock, you’re buying cash.

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The U.S. dollar fell against its major trading partners Wednesday as investors digested a barrage of economic data ahead of the holiday.
The euro edged higher against the dollar to trade at $1.4006, from $1.3950 late Tuesday in New York.
The British pound remained weak against the dollar at $1.4752 from $1.4759. The pound fell sharply in the previous session after the U.K. government reported that the country's gross domestic product contracted by 0.6% in the third quarter.
Against the Japanese yen, the dollar dipped to ¥90.50 from ¥90.89.

"Markets are looking relatively quiet ahead of the holiday with the U.S. dollar generally weaker," said Steve Malyon, currency strategist at Scotia Capital in Toronto. He added that currency traders will be focused on economic data released earlier.
Trading is expected to be light with many market participants on vacation. U.S. stock markets will close early at 1 p.m. ET and remain shut on Thursday for the Christmas holiday.
Markets in Germany are closed Wednesday and Thursday. Most other European markets will also stop trading early Wednesday.

In addition to light participation, many investors have closed their books for the year and are not planning to make any large moves until 2009.
Still, the currency market will have to make sense of a flurry of economic data released early Wednesday.
In another sign of deterioration in the job market, the Department of Labor said the number of people filing initial unemployment insurance claims rose more than expected last week.
New jobless claims rose to 586,000 in the week ended Dec. 20. That's an increase of 30,000 from the previous week's revised figure of 556,000, and is more than the 558,000 total forecast by economists.

Wednesday's report revealed the highest number of jobless claims since Nov. 27, 1982, when initial filings hit 612,000,
Meanwhile, new orders of durable manufactured goods fell for the fourth month in a row, according to the Census Bureau.
Durable goods orders fell 1% to $1.9 billion in November. Excluding orders related to transportation, new orders increased 1.2%.

Still, the decline was not as sharp as expected. Economists had forecast goods orders to sink 3.1% after plummeting 6.2% in October - the biggest decline since 2006.
Separately, the Commerce Department said both personal income and spending decreased in November.
Personal income dipped 0.2% after a modest 0.3% increase in October. The reading was expected to be flat.

Personal spending fell 0.6% versus a decline of 1% the month before. But the figure was better than the 0.8% decline that economists were expecting.
Markets in Asia ended lower with the Hang Seng in Hong Kong falling 0.26%. Major indexes in Europe were lower near the close of trading.

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Euro Holds Near Record Highs Versus British Pound, Both Remain Under Pressure Against US Dollar

The euro continues to trade near record highs versus the British pound, as the pair has done little but consolidate below 0.9500 - 0.9550. On the flip side, the individual currencies have gone relatively unchanged versus the US dollar, leaving EUR/USD to consolidate below 1.40 while GBP/USD has traded in a range of approximately 1.4700 - 1.4850. The moves came following the release of disappointing UK GDP revisions, as the economy actually contracted 0.6 percent during Q3 compared to initial estimates of a 0.5 percent contraction.

The GDP figures confirm that the UK fell into recession for the first time since 1990-1991 as a result of the sharpest drop in consumer spending since 1995 and a decline in investment as the financial crisis took its toll. The Bank of England has already cut rates to 2.00 percent, the lowest since 1951, but this data only adds to speculation that they will reduce the Bank Rate by another 50bps in January. As a result, the odds remain in favor of further declines for the British pound, especially against the euro.

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American International Group Inc (NYSE:AIG - News) CEO Edward Liddy on Monday, defending retention bonuses, says it's the only way to keep good people, in an interview on CNBC.

* AIG's Liddy says the company's done everything in a very transparent way-CNBC

* AIG's Liddy says, if we owe the federal government money, "we want to pay it back" -- CNBC

* Liddy says "we've laid out everything for lawmakers" -- CNBC

* CEO says "we're very encouraged by the level of interest" for assets-CNBC

* CEO says wants to get substantially more than 0.5 or 0.6 of book value for life insurers-CNBC

* CEO says would like to pay back government in 2009-cnbc

* Liddy says, "it's not our intent to hide anything or to frustrate members of congress" -- CNBC

* CEO says if capital markets, credit markets were to continue to deteriorate, 'it's anyone's guess' what could happen-CNBC

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