eur fundamentals

Euro, British Pound to Dominate Headlines Thursday Amidst ECB, BOE Rate Cuts -€“ What to Expect

Thursday, 06 November 2008 04:12:03 GMT  |  Terri Belkas, Currency Strategist

The euro and British pound both edged lower on Wednesday, and while all the European economic data in the world argues in favor of weakness for the two currencies, the price action we’ve been seeing lately has had more to do with the very broad trend of flight-to-quality into “safe-havens” like the US dollar.

However, on Thursday, the monetary policy decisions scheduled to be announced by the European Central Bank and the Bank of England have the power to shake these currencies up. What should you expect?

European Central Bank - A Bloomberg News poll of 55 economists shows that the European Central Bank is very likely to cut interest rates by 50bps to a nearly 2-year low of 3.25 percent at 7:45 ET. Indeed, economic conditions have deteriorated rapidly throughout the region, with the October PMI readings showing that business activity in the Euro-zone’s manufacturing and services sectors has been contracting for five consecutive months. Meanwhile, Eurostat’s estimate of Euro-zone CPI shows that price growth eased to a 3.2 percent pace in October from 3.6 percent. Given European Central Bank President Jean-Claude Trichet’s more bearish stance on the economy and the bank’s participation in the October 8 coordinated rate cuts, the indications of cooler inflation pressures gives the ECB even more room to cut rates on Thursday. The reaction of the euro, however, may depend more on Mr. Trichet’s post-meeting press conference at 8:30 ET as his speeches tend to be very straightforward and biased. If Mr. Trichet suggests that the ECB will cut rates further, the euro is likely to take a sharp hit but if he signals a more neutral stance going forward, the currency could actually rebound.

Bank of England - The Bank of England is widely anticipated to follow up their October 8 rate cut with yet another 50bp cut to 4.00 percent at 7:00 ET, as the UK economy tips into recession and the financial markets remain unstable. While UK CPI remains well above the BOE’s 2 percent target and 3 percent ceiling at 5.2 percent, weaker commodity prices have led inflation outlooks around the world to drop rapidly. Furthermore, BOE Monetary Policy Committee member David Blanchflower, who has long been the most dovish of all the members since joining the Committee in mid-2006, was as staunch in his bias as ever when he noted that he thought deflation was a bigger concern than inflation, and that CPI may fall from the September reading of 5.2 percent down to 1 percent, or could even go negative. Mr. Blanchflower also said that UK interest rates must be lowered significantly and quickly. While a Bloomberg News poll of economists shows that the odds are in favor of a 50bp reduction, Credit Suisse overnight index swaps are actually fully pricing in a 75bp cut. If the BOE does indeed slash rates more than expected, the British pound could fall quite a bit.

Related Articles: Euro's Future Dependent on the Dovish Pace the ECB Sets Next Week, British Pound Forecast Remains Bearish on Bank of England Rate Prospects

Resources

• free demo account
• forex courses
• open an account
• forex stream
• free webinars