The best way to play a slump in the pound

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There were no surprises from central banks yesterday.

Both the Bank of England and the European Central Bank kept interest rates on hold, at 5.75% and 4% respectively.

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Up until just over a month ago, both banks were widely expected to crank rates higher - but they don't have to. The credit squeeze has done it for them.

As Ambrose Evans-Pritchard points out in The Telegraph, the strong euro and the credit crunch have tightened lending conditions in the eurozone without the ECB having to lift a finger. "The 7.5% rise in the euro against its trade-weighted average last year is equivalent to a 1% rise in interest rates." That's pretty chunky - particularly when you realise that the housing slumps in Ireland and Spain were already hurting growth in the region, even before the crunch and the currency started to bite. The second quarter saw the European construction sector shrink by 1.6%.

Meanwhile, even though the Bank of England kept interest rates on hold, the cost of debt is still rising for the UK consumer. As Edmund Conway points out in the same paper, Abbey - Britain's second-largest mortgage lender (behind HBOS, which has already signalled plans to stop chasing market share and start making its loans more profitable) has just hiked its tracker mortgage rates. And a note by Richard Jeffries at Ingenious Securities suggests that UK consumers could be paying 26% more in interest payments by the end of this year.

The Halifax housing data yesterday showed that signs of stress are already beginning to tell on the housing market. The month-on-month fall in September was 0.6%, but this is very volatile, and barely worth looking at. Annual price inflation fell from 11.5% to 10.7% - significant, but again, hardly a cause for worry.

It's the quarter-on-quarter figures that were the real revelation. Quarterly price growth fell to 0.9%, the lowest since September 2006. The only regions that saw prices rise by more than 1% were the South East (up 1.8%) and London (up 2.3%). Northern Ireland and the North saw prices actually fall, by 3.2% and 2.1% respectively.

That's a pretty big dip, particularly if you take inflation into account. That would be a real terms fall in Northern Ireland house prices of more than 5%. As Howard Archer of Global Insight said: "The Halifax report is quite an eye-opener."

It's no surprise that Northern Ireland is feeling the pain - prices there were shooting up at ludicrous rates only very recently - and the Irish housing collapse is bound to have had some impact there. But there's no real excuse for the North to be suddenly seeing the squeeze, except that perhaps the heat is finally going out of the market for all those new-build flats being thrown up around the region's city centres.

The usual suspects were out in force calling for rate cuts - estate agents, the British Retail Consortium - but the Bank of England has other things to worry about than property and retailers. HSBC reckons that the pound could take a hammering in the wake of Northern Rock and a slowdown in the economy - falling to as low as $1.76 over the next 18 months, as international investors yank their money from the UK.

This would be a big problem - a weaker currency means stronger inflation. But it's also a good opportunity. We wouldn't suggest betting on a dollar rebound - the US currency is far too wobbly to risk that. But the possibility of a sterling slump does make now a good time to buy gold. We're sitting at $2 to the pound roughly at the moment, and gold is priced in dollars. If you buy gold now, then sterling slides, your gold holding will go up by the same amount.

And if the dollar remains weak relative to currencies other than sterling - as it should, given the economic outlook - then the gold price should also remain strong. You can find out more about how to buy gold at: Investing in gold.

Just before we go, once again, I need to warn subscribers that due to the rather lengthy postal strike this week and next, there's a good chance you won't get this week's issue until well into next week. Once again, we're very sorry about this - we are unfortunately at the mercy of the Post Office. However, you can download the latest issue as a PDF. If you have any problems with downloading it, send me an email (johns@moneyweek.com) and I'll get our customer services team to help you out.

Turning to the wider markets

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In London, the FTSE 100 ended the day just 12 points higher, at 6,547, well off a session high of 6,593. Northern Rock led the risers with gains of nearly 10% on takeover hopes. For a full market report, see: London market close

Across the Channel, reaction to the ECB'sexpected interest rate decision was muted.The Paris CAC-40 was one point lower, at 5,804, and the Frankfurt DAX-30 was down 10 points to 7,944.

On Wall Street, stocks closed with modest gains after a fairly calm day's trading ahead of today's key payroll data. The Dow Jones was up 6 points, at 13,974. The tech-rich Nasdaq was up 4 points, at 2,733. And the S&P 500 was 3 points higher, at 1,542.

In Asia, the Japanese Nikkei closed 27 points lower, at 17,065. However, strength amongst commodities stocks saw the Hang Seng up by as much as 857 points - to 27,831 -at time of writing.

After climbing over $1.50 on the NYMEX yesterday, crude oil had slipped backto $81.25. And in London, Brent spot had fallen to $79.40.

Spot gold fell to its lowest level in a fortnight - $720.70 - in New York yesterday,but had since reboundedto $737.20 on dollar weakness.And silver had risen to $13.38.

In the foreign exchange markets, the pound was at 2.0357 against the dollar and 1.4430 against the euro. And the dollar was at 0.7086 against the euro and 116.51 against the Japanese yen.

And in London this morning, budget airline Easyjet (EZJ) announced that pre-tax profits were due to come in at the top end of forecasts thanks to successful cost-cutting measures. Easyjet shares climbed by as much as 4.1% in early trade.

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