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BOE Lowers by 50bp Says Weak Pound Enough Stimulus

Last updated 1/8/2009 7:27 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Bank of England dropped the benchmark UK interest rate to 1.5% easing by 50bp as expected. The Monetary Policy Committee noted that the sharp drop in the pound provided additional stimulus to the UK economy tempering the need for more drastic rate cuts at the present time. The Central Bank acknowledged the severity of the UK recession stating that business and consumer confidence have declines markedly while noting that output is likely to drop sharply in the first half of 2009.

Cable rallied strongly on the news shooting past the 1.5200 level in the immediate aftermath of the release. Most traders anticipated the 50bp cut and were relieved to see the BoE simply match expectations instead if easing more aggressively. Only a few weeks ago the consensus market call was for a full 100bp cut from the BoE, so given today’s more modest response the news can be viewed as victory for pound bulls.

EUR/GBP which registered a parabolic move at the end of 2008, mostly on expectations of UK rates sinking to 1.00% continued to correct its rally dropping below 9000 level after the announcement. The pair is likely to fall further given the weakness in overnight German trade balance data and the very sharp contraction in factory orders.

Although the ECB has been the only G-4 central bank to resist the move below 2% in response to the growing global economic recession, the currency market  is quickly coming to the conclusion that European monetary policy makers will have no choice but to relent on their uber-hawkishness stance sooner rather than later. As result the euro will begin to feel the full weight of adjustment in interest rate expectations. In the meantime the pound should benefit on are relative basis as its yield will remain above 1% for the time being stoking further decline in EURGBP.    

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.