Fed Slashes Rates to 0.25%
Pound Sterling - UK Markets
Sterling has recovered substantially against a broadly weaker US Dollar, currently trading at the 1.55 level. Against the Euro the Pound continues to slide, reaching a new low yesterday and sitting at 1.103 this morning.
The Office of National Statistics announced this morning that unemployment hit 1.86 million in the three months to October. David Blanchflower, labour market expert from the Bank of England, has warned unemployment is set to reach 3 million during the current recession. The weakening labour market will continue to weigh on Sterling as employment is a key factor in consumer confidence and business sentiment. Retail and consumer price inflation figures yesterday showed inflation declined to 4.1% in November from 4.5% the previous month. The Bank of England's inflation letter announced rates could move ‘materially' below the official target of 2% in the second half of 2009 as lower energy prices, interest rate reductions and heavy discounting from retailers drive prices lower. Today the Bank of England Minutes are released and these could provide clues as to further rate decisions in 2009. Economists are currently predicting UK base rates could fall to 1% which is also a source of pressure for the Pound.
US Dollar - US Markets
The US Dollar depreciated internationally following the Fed's interest rate decision. Reaching a 13 year low against the Japanese Yen yesterday, the Dollar remains low against its international partners this morning as market confidence increases risk appetite internationally.
The FOMC reduced the US base rate to 0.25% yesterday, taking interest rates to their lowest level in the history. The 0.75% reduction is essentially a zero interest rate policy and was accompanied by Federal pledges of more unorthodox measures to stimulate the property market and ward off deepening recession. Wall Street jumped 4.2% in response to the news and equities climbed around the world. The price of oil has also risen for the first time in 4 days after OPEC announced a cut in production by 2 million barrels a day. This also contributed to Dollar weakness and OPEC could find themselves in a Catch 22 as attempts to raise the price of oil potentially undermine global recovery prospects. Today is light for US data with the Philadelphia Fed Manufacturing Survey, a key indicator of manufacturing sentiment, due tomorrow.
Euro - European Markets
The Euro continues its bullish run on the Pound and US Dollar this morning, up 0.48% against the Dollar and nearly 1% against the Pound.
While interest rate cuts and inflation data in the US and UK have dominated the global headlines this week, the Euro has remained out of the spotlight and benefited from collective stability. Consumer Price Inflation rates are due from the Eurozone today and these could indicate the extent to which deflation is likely to become an issue in 2009. The ECB has signalled it will not continue to cut interest rates into 2009 and has limited scope compared to its international counterparts to do so which could affect the value of the Euro in future. The Bank of Japan's interest rate decision is also due on Friday.