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BoE Cuts But Pound Rallies

Last updated 2/5/2009 7:32 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

As expected the BoE cut the overnight lending rate by 50 basis points to 1.00% - the lowest UK rate in the 300 year history of the central bank.  BoE cited the risk of a substantial undershoot in the country’s inflation rate and noted that the series of rate cuts will eventually have a significant impact on the UK economy.

Despite the lowering of rates to record levels, the currency market responded with enthusiasm  to the this policy move rallying the pound by more than 100 points in the wake of the announcement.  In an environment where three out four G-4 currencies now sport rates of 1.00% or less yield no longer matters  as a valuation measure for most market participants.  Instead, given the global economic recession, currency traders now favor those economies whose fiscal and monetary policies are designed to be most stimulative in the short run.

To that end, the aggressive action of the BoE was received favorably by the market which now believes the stimulus will propel the UK to a recovery faster than the rest of Europe. Certainly this week, the positive surprises in the three PMI measures suggest that the UK economy, which up to now was in a tailspin, may have found some measure  of stability and is now ready for a rebound. With cable having taken out the 1.4500 handle with conviction the bias for the time being remains to the upside.

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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.