Bank Cuts to 2%
Pound Sterling - UK Markets
The Pound plummeted to a record low of 1.14 against the Euro yesterday after the Bank adjusted interest rates to their lowest level since 1951. Sterling has recovered marginally this morning as market focus switches to the US but is still sitting at very low levels, 1.47 versus the Dollar and 1.15 versus the Euro.
The UK base lending rate is now at 2%, the lowest level in 57 years. The Bank of England's accompanying report sited weak survey data and deteriorating economic conditions for the reduction and this morning the government has urged banks to quickly pass these savings onto consumers. Although the rate cut was widely expected by markets, the value of Sterling plummeted following the decision and is likely to remain under pressure as further reductions are expected in early 2009. The London FTSE 100 had dropped nearly a percentage point this morning as markets predict the worst jobless figures in 26 years out of the US today. There is no data out in the UK today.
US Dollar - US Markets
The Dollar is broadly weaker this morning as market focus moves to the US with the publication of the official US unemployment rate. As it is strongly correlated to consumer confidence and business sentiment, rising unemployment is likely to induce bearish trends in markets and the US Dollar. Economists are predicting a 0.3% rise from 6.5% to 6.8%. As the US accounts for 25% of the global economy, US economic outlook is inextricably linked to global prospects. Further negative data will have a bearing on the next interest rate decision and we could see the Fed cutting base rates to 0.5% this month. The price of oil continues to plunge below $44 a barrel amid little disruptions to supply, fuelling the decline in inflation rates around the world. The unemployment rate and non-farm pay roles are due at 1:30 today.
Euro - European Markets
The Euro has gained against the US Dollar this morning and most of its European currency partners, although is down slightly against the Pound to 0.86.
The ECB also slashed interest rates yesterday by 0.75%, taking the base rate to 2.5% and making it the largest cut in the Bank's 10 year history. Sweden also cut interest rates by a record 1.75% taking their base rate to 2%. Many economists fear deflation is the next major issue for the Eurozone as interest rates approach zero and Trichet is coming under pressure to form a contingency plan for this scenario. There is no major data from the Eurozone today.