British Pound Falls to Lowest in a Week as UK Consumer Confidence Disappoints Read more: DailyFX - British Pound Falls to Lowest in a Week as UK Cons

The British Pound fell to the lowest level in a week against the US Dollar after UK consumer confidence posted the largest decline in over a year in December as stimulus measures fade and the government reverses a value-added tax reduction.

Key Overnight Developments

• UK Consumer Confidence Fell Most in Over a Year, Shop Prices Surged
• Australian Building Approvals Topped Expectations on Public Spending

Critical Levels



The Euro consolidated NY-session losses in overnight trading, oscillating in a choppy range above 1.4340. The British Pound dropped to the weakest level in a week, testing as low as 1.5945 against the greenback on a drop in consumer confidence (see below). We remain short EURUSD at 1.4881 and short GBPUSD at 1.6648.

Asia Session Highlights



UK Consumer Confidence fell more than expected in December with an index from the Nationwide Building Society slipping to 69 from a revised reading at 74 in the previous month, the largest decline in over a year. Economists were forecasting a print at 72 ahead of the release. A sub-index tracking consumers’ expectations about the economy 6 months into the future dropped to the lowest level since August 2009. Nationwide Chief Economist Martin Gahbauer said the outlook for consumer spending may turn out to be “sluggish” in 2010 as stimulus measures are withdrawn while the government returns the value-added tax (VAT) to 17.5% from 15% where it had been for past year to help deal with the burgeoning fiscal deficit.

The VAT was also a key factor behind a jump in retail inflation as the British Retail Consortium’s Shop Price Index gained 2.2% in the year to December. Indeed, the VAT was first lowered in December 2008, exactly one year before the period covered in today’s release. BRC Director General Stephen Robertson also identified “increases in the costs of oil, food commodities such as wheat and sugar and the continued weakness of the Pound” as contributing factors to higher prices.

In Australia, Building Approvals outperformed expectations to rise 5.9% from the previous month and 33.3% from a year before in November. However, the outcome is not as encouraging as the headline figure would suggest considering most of the upswing was accounted for by a huge 28.8% increase in approvals for government-funded buildings, an increase more than six times larger than the rise in permits for private construction projects. The data likely reflects a boost from the infrastructure projects approved as part of last year’s fiscal stimulus plans, meaning it says relatively little about the likelihood of a robust self-sustaining recovery in the property market even as mortgage rates begin to reflect higher benchmark borrowing costs while the government reduces its grant for first-time home buyers to A$7,000 from A$21,000.


Euro Session: What to Expect



The final revision of the composite Euro Zone Purchasing Manager Index is expected to confirm that the metric rose to 54.2 in December from 53.7 in the previous month, revealing that the currency bloc’s manufacturing and services sectors expanded at the fastest pace since October 2007. The metric has steadily pushed higher since bottoming in February of last year, upward momentum may be slowing as firms look ahead to the withdrawal of stimulus measures amid uncertainty about the pace of a self-sustaining recovery as record-high unemployment and shrinking private-sector lending continue to weigh on spending and investment. Indeed, December’s outcome will mark the smallest increase in the PMI gauge in 10 months.

Elsewhere on the calendar, Euro Zone Industrial New Orders are set to decline 1% in October, the first drop since March, likely reflecting fading support from close to $2 trillion in global fiscal stimulus that has underpinned both domestic and foreign demand over recent months. The Producer Price Index is expected to have declined -4.5% in the year to November, the smallest decline in 9 months, as rebounding commodity prices put upward pressure on wholesale inflation. However, the outcome is unlikely to prove particularly market-moving with the underlying themes behind the headline figure likely to have been priced in after yesterday’s preliminary CPI release.