Pound Rises after BoE Cuts Benchmark Rate By 50 Bps, But Leaves Doubt of Further Easing

The BoE cut their benchmark rate by 50 bps as expected bringing it to 1.50% which is the lowest in the history of the central bank which extend back to 1694. The concern that inflation would undershoot their 2% target was the main reason for the reduction as prices are expected to fall further.

• Japanese Yen: Finds Support At 91.60
• Pound: Cuts Benchmark Rate To Historic Low of 1.50%
• Euro: Recession Confirmed As Confidence Drops To Record Low
• US Dollar: Initial Jobless Claims On Tap

Pound Rises after BoE Cuts Benchmark Rate By 50 Bps, But Leaves Doubt of Further Easing

The BoE cut their benchmark rate by 50 bps as expected bringing it to 1.50% which is the lowest in the history of the central bank which extend back to 1694. The concern that inflation would undershoot their 2% target was the main reason for the reduction as prices are expected to fall further. The committee also expressed concerns that the outlook for investment continues to deteriorate and stated that further measures were needed to boost lending to businesses. However, the central bank claimed that the pound’s significant drop and falling inflation will provide stimulus to the economy. The comments were somewhat hawkish and left doubts of further easing, which sent the pound up over 100 pips to test 1.5200.

A slew of European economic data crossed the wires today furthering the case for an ECB rate cut. Economic confidence fell to a record low of 67.1 from 74.9, while consumer confidence dropped to -30 from -25. Final GDP numbers for the 3Q confirmed that the economic region is in a technical recession as it posted -0.2% growth. Meanwhile, the unemployment rate rose to 7.8% from 7.7% which was the highest in two years. Germany, Europe’s largest economy showed signs that the current downturn may continue to accelerate as exports fell by a record 10.6%. November factory orders in the export driven nation dropped by 6.0% after a decline of 6.3% the month prior, which dragged the annualized to a record low of 27.2%. The Euro would drop a 100 bps leading up t the data, after a brief period of consolidation the Euro would weaken as the pound strengthen against on the back of the BoE’s comments.

Swiss fundamental data added to the dour outlook for Europe as unemployment jumped to 3.0% from 2.7% which was the highest in 19 months. Companies have been forced to cut payrolls as global demand has dried up for Swiss goods. Meanwhile, inflation fell to 0.7% from 1.5% adding to the global deflation concerns which may spur other central banks to employ quantitative easing similar to the Fed. After falling to as low as 1.0918 yesterday, the dollar/franc has pushed back above 1.1000.

Today’s jobless claims number is expected to rise to 545,000, adding to the deteriorating labor picture. Indeed, yesterday’s ADP report that showed the economy lost 693,000 jobs in December making initial estimates of -500,000 for tomorrow’s NFP reports look tame. The dollar has come under pressure as the outlook for growth in 2009 worsens. However, as traders start to anticipate the same fallout from the financial crisis in Europe and Asia, the dollar may resume its upward trend over the medium term. Expect the greenback to continue its weakness against the Yen and Swiss Franc in the short term, as risk aversion has taken hold of markets as forecasts for a rebound in growth get pushed out until 2010.

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