16‏/12‏/2008

BoE Cuts Rates by 100bps, Signals Further Action As Credit Conditions Remain Difficul

Talking Points
• Japanese Yen: Finds Support at 92.50
• Pound: BoE Cuts Rates By 100 bps
• Euro: Rate Decision Ahead
• US Dollar: Jabs Data On Tap

BoE Cuts Rates by 100bps As Expected But Signal More Action To Come As Credit Conditions Remain Difficult.

The Bank of England cut their benchmark rate by 100 bps as was expected by economist bringing it to 2.00%. The Pound traded higher on the news reversing earlier losses as traders started to expect a more aggressive move given the dour fundamental data that has recently crossed the wires. The release of the HBOS home price indicator showed that values drop another 2.6% in November which sent the pound below 1.4500 for the first time in over six years. Credit conditions remain tight which has kept the housing market from bottoming which has forced the central bank to take more measures to provide liquidity to the market.

The BoE in its post announcement remarks stated that its “unlikely that normal lending volume restored without action” as “money, credit market conditions extremely difficult”. The central bank said the consumer spending and business investment has stalled which has dragged the economy into a recession. The MPC expects inflation is likely top drop further with the possibility of it falling below its 2% target very likely. The comments signal that the central bank is not done taking action and more easing is very likely in the near-term which could lead the pound lower as markets digest the comments.

The Euro traded heavy in early trading falling to as low as 1.2549 before finding support. The Riksbank unexpected 175 bps rate cut led to the Euro dropping as speculation increased that the ECB would cut rates deeper than expected at today’s rate decision. The Swedish bank wasn’t scheduled to make a policy decision until December 17th and the preemptive move demonstrates how dire the circumstances are in Europe. The ECB is expected to cut rates by 50 bps at 12:45 GMT, but the possibility of a deeper cut has significantly increased. Indeed, the second reading of GDP for the third quarter remained at -0.2% confirming the region’s economy is in a technical recession and the lower revision of household consumption demonstrates the lack of confidence by the consumer. A more aggressive move could sink the Euro below support at 1.2330, the October 28th low with 1.2000 a possibility. However, if the central bank meets expectations and President Trichet demonstrates no intention to deviate from the MPC’s measured approach then we could see a bullish reaction with a break above 1.3000 a possibility.

The majority of the event risk for the dollar may hinge on the markets interpretation of the actions from the European central banks. The continued easing could brighten the outlook for the global economy sparking risk appetite and leading to dollar weakness. However, employment data may dampen demand for risk as jobless claims are expected to remain above 500,000 for the fourth week in a row. U.S. factory orders are expected to have fallen 4.5% in October adding to the evidence the frozen credit markets brought manufacturing activity to a halt. Despite the fundamental data headlines that GM and Chrysler are considering pre-arranged bankruptcy could have a major impact on risk appetite. The potential impact on the U.S. economy of two of the three major U.S. automakers falling into bankruptcy could send traders to the sidelines. However, the potential resolution to Detroit’s troubles could bring relief to traders, who dislike the unknown and spark bullish sentiment.

British Pound Could Rise Even If the Bank of England Slashes Rates

The outlook for the British pound looks dim as the Bank of England is widely anticipated to follow up their October 8 and November 6 rate cuts with yet another aggressive reduction on Thursday morning. Currently, the markets are betting on a 100bp cut to 2.00%, which would bring the Bank Rate its lowest level since 1939. However, the BOE's subsequent monetary policy statement will be just as important, as it will provide a gauge as to what the central bank will do next, and may determine the British pound's next move.

The Bank of England is widely anticipated to follow up their October 8 and November 6 rate cuts with yet another aggressive reduction at 7:00 ET on December 4. As of November 26, a Bloomberg News poll shows that the majority of economists surveyed thought that the BOE would reduce the Bank Rate by either 50 or 100 basis points, with the consensus forecast calling for the latter. Likewise, Credit Suisse overnight index swaps are fully pricing in a 100 basis point cut, and it seems increasingly likely that the BOE will slash the Bank Rate to the lowest since 1939, when rates were at 2.00%.

Bank of England Voting History Since August 2007

The BOE’s upcoming decision will be just one of many efforts put forth in an attempt to prevent the UK economy from falling into a prolonged recession, as Chancellor of the Exchequer Alistair Darling downgraded growth forecasts during his pre-budget report on November 24 to 0.75 percent in 2008, between -0.75 and -1.25 percent in 2009, and between 1.5 to 2 percent in 2010. Chancellor Darling also announced a £20 billion fiscal stimulus plan, which calls for a cut to the Value Added Tax (VAT) to 15 percent from 17.5 percent, boosts to state pensions and child benefits, extensions of employment support, and a housing support package, among other things. In order to accommodate for some of these costs, Chancellor Darling said that after April 2011 those earning at least £150,000 a year would face an income tax of 45 percent

12 dec 2008 ECB Rate Decision

ECB policy members held the benchmark interest rate steady at 4.25% despite the downturn in the global financial market. The central bank was widely expected to hold a neutral policy stance as inflation remains well above their desired target, but could be forced to lower borrowing costs over the coming months as the spillover effects of the credit crunch spreads throughout the global economy. Increased turmoil in the financial sector has already led governments throughout Europe to step in as the lender of last resort, and policy makers may opt to take additional steps to avoid a severe downturn in the economy. Moreover, falling commodity prices should help to lower prices pressures in the near-term, which should allow the ECB to push inflationary concerns to the backburner as fears of a recession intensify.

dec 2008 ECB Rate Decision

The European Central Bank lowered the benchmark interest rate by 50bp to 3.25% from 3.75% following the coordinated rate cut on October 8^th. The ECB, along with the Fed, lowered the key rate by 50bp to 3.75% from 4.25% in order to avoid a global meltdown. Meanwhile, falling oil prices have certainly helped to taper the upside risks for inflation, which would allow the central bank to hold a dovish outlook going forward.

ECB President Trichet explicitly stated that policymakers may lower the benchmark interest rate further as they expected economic activity to remain subdued for ‘a rather protracted period’ of time, and may continue to ease policy throughout the next year as the economy heads into a recession. The remarkable shift in policy has clearly weighed on the euro, and may weaken further against the U.S. dollar as investors curb their appetite for risk.

EURUSD - Trading the ECB Interest Rate Decision

The European Central Bank is widely expected to lower the benchmark interest rate by 50bp to 2.75% as price pressures cool. Falling commodity prices have certainly helped to eliminate the upside risks for inflation, and should allow the central bank to ease policy further as they carry out their one and only mandate to ensure price stability.

Trading the News: European Central Bank Rate Decision

What’s Expected

Time of release: 14/12/2008 T

Primary Pair Impact : EURUSD

Expected: 2.75%

Previous: 3.25%
Impact of the ECB rate decision on EURUSD over the last 3 months

US Dollar Index: The composite COT has dropped from high levels, which warns of a top. However, with speculative longs gradually decreasing and now back to more normal levels, confidence in a top is low

EUR: Composite COT remains near historically low levels, which is suggestive of a bottom. However, speculative shorts have gradually declined and positioning is not considered extreme anymore, which decreases confidence in a contrarian play.

The only significant developments in the COT are in the Swiss Franc futures. Speculators are extremely short CHF futures, which suggests a CHF bottom (USDCHF top).

Forex Trading Weekly Forecast - dec 2008

Forex Trading Weekly Forecast - dec 2008

Forex Scalping - How to Make Money Hand Over Fist

Weekly FX Market Outlook: Eyes on FOMC Rate Decision

Federal Open Market Committee is to set interest rate on Tuesday Dec. 16. Estimates show the possibility of a 50 basis points reduction when any reduction will bring the federal funds target rate below 1.00 percent. With interest rate close to zero, speculations rise about using unconventional measures for supporting the economy.

Deflation Looms
Fear of a widespread deflation continues to dominate markets by darkening outlook for corporate’ profits. Central banks around the world have cut their benchmark interest rates in recent months in response to the sharp slowdown in global economic activities.

In the U.S. and some other major economies like the Britain, interest rates are headed to zero and policymakers’ fear is that they may run out of ammunition, especially if the downturn lasts more than expected. Fed’s Chairman Ben S. Bernanke already announced that he may use unconventional measures to inject money into the system.

As another sign of falling prices, CPI report from the U.S. Department of Labor on Tuesday may show that the cost of living fell sharply in November after a 1.0 percent decline in the previous month. The same day, the FOMC will decide on interest rate.

U.S. Industrial / Housing Sectors
Reports from the Federal Reserve on Monday are expected to show continuing weakness in industrial sector. Industrial Production probably fell in November when the Capacity Utilization, a measure of the extent of capital used in the production, is also expected to stay at low levels.

Housing Starts and Building Permits remain at historical low levels, a Tuesday’s report from the Commerce Department may show. While recent data from the U.S. housing market show no sign of improvement, some analysts believe that it may be near to the bottom.

ECB’s Smaghi in Washington
Early estimates for the Purchasing Manages Indexes on Tuesday probably show that the manufacturing and service sectors in Euro-zone continued to shrink in December.

On Thursday, the IFO survey may show that German businesses are still pessimistic about the future; though a similar survey from the ZEW came better than expected last week.

The recession worsen but the European Central Bank members seems to have different views about how to response. ECB has been more aggressive than ever, but some members want to keep the flexibility for the future. ECB’s Bini Smaghi speaks in Washington late on Monday and the Euro could react to any data that show the direction that the ECB is headed.

Bank of England Minutes
Minutes from the Bank of England on Wednesday may show a consensus among policymakers when they decided to cut the bank rate by 100 basis points on Dec 4. Economic data this week could also confirm their concerns.

Monthly jobless claims probably increased by 45,000 in November and unemployment rate reached to 6.0 percent.

Another report on Thursday is expected to show a 0.4 percent decline in retail sales at the same period, showing consumers become more cautious about spending on anticipation of economic difficulties ahead.

16‏/12‏/2008

BoE Cuts Rates by 100bps, Signals Further Action As Credit Conditions Remain Difficul

British Pound Could Rise Even If the Bank of England Slashes Rates

12 dec 2008 ECB Rate Decision

dec 2008 ECB Rate Decision

EURUSD - Trading the ECB Interest Rate Decision

Forex Trading Weekly Forecast - dec 2008

Forex Scalping - How to Make Money Hand Over Fist

Weekly FX Market Outlook: Eyes on FOMC Rate Decision

تصفح الموقع بالعربية

show english mode

عداد الزوار