Surprise 1.5% from MPC
Pound Sterling - UK Markets
Big news for Sterling was the 1.5% reduction in interest rates by the Bank of England yesterday. While some economists were predicting 1% reduction, the majority of speculators were banking on a more conservative 0.5% cut. The drastic move by the bank was taken well by markets, interpreted as a hawkish intervention to halt recession, after inflation has begun to fall away. The UK base rate now sits at 3%, the lowest since 1955. With Q4 statistics expected to show the UK economy in recession, the cut is an attempt by the Bank to quickly pass savings onto consumers and the bridge the gap between base rates and LIBOR which is still holding up interbank lending.
Sterling declined immediately following the decision, as investors contemplated the consequences of the decision. The Pound has since regained strength, against all but the high yielding currencies, but failed to make a dent in equity markets by providing major relief. Taken in combination with cash injections and lowered threshold collateral is part of an attempt to revive the flow of credit which is still holding the global economy hostage.
This morning brings news the UK trade deficit at 4% of GDP and car sales fell in October at the fastest rate in 17 years. The market looks towards the goods trade balance for Sterling, due early next week.
US Dollar - US Markets
The US Dollar strengthened in the aftermath of rate cuts in the UK and Europe but has dropped away this morning pending the release of employment data in the US.
The announcement this morning that the IMF has revised world growth forecasts to 2.2% has sent equity markets in to decline throughout the world, failing to record the positive sentiment resulting from interest rate cuts.
The US Dollar fell for third day against the yen ahead of employment data which is expected to add impetus for further interest rate cuts from the Fed. With Japanese rates at 0.3% and some economists are predicting a ‘race to zero' as recession seizes the global economy. US interest rate currently sit at 1% and Japan at 0.3%
Brent crude is significantly lower following revised world growth prospects. Trade balance and retail sales figures for October are due next week.
Euro - European Markets
The Euro strengthened yesterday after the ECB followed the Bank of England in cutting interest rates, albeit by a more conservative 0.5% to 3.25%. Inflation fears in the Eurozone are beginning to wane and Central Banks are now targeting recession. Sweden, Denmark and the Czech Republic each made interest rate cuts of their own.
Iceland is to receive $6 billion worth of aid from the IMF to unfreeze credit markets, with the economy predicted to shrink by 8.3% next year.
German industrial production and trade balance data is due today