gbp fundamentals

Euro, British Pound Remain Under Pressure on Negative Outlooks from IMF, BOE's King

Wednesday, 22 October 2008 22:56:40 GMT  |  Terri Belkas, Currency Strategist

The British pound and continued their freefall on Wednesday, as GBP/USD stabilized above 1.6150 while EUR/USD tested 1.2750.

Most of the declines actually came during the Asian trading session as risk aversion remained the predominant sentiment in the markets, leading anti-dollar trades like the euro and British pound along with Japan’s stock markets lower. In fact, the Nikkei 225 ended the day down 6.79 percent while the Topix plunged a whopping 7.05 percent. The major news for Europe came a few hours later, though, with the most shocking revelation coming from Bank of England Governor Mervyn King who said the UK economy was likely headed for recession. This was followed by the release of the minutes from the Bank of England’s October 8 meeting, which showed that the 50bp cut to 4.50 percent implemented that day was by a unanimous vote. Given the substantial downside risks to growth, persistence of the credit crunch, and broad dovish bias amongst the BOE’s Monetary Policy Committee members, it is clear that the central bank will be cutting rates multiple times in coming months, and in fact, Credit Suisse overnight index swaps are pricing in nearly 175bp worth of reductions during the next year.

Meanwhile, a damning outlook from the International Monetary Fund (IMF) spurred fears about the Euro-zone’s financial sector. In its October 2008 Regional Economic Outlook for Europe, the IMF warned that more European banks could fail “as implied by their very high risk spreads and market doubts about the viability of their business models.” With a recovery not expected until late 2009, the European Central Bank (ECB) may be forced to make monetary policy significantly more accommodative going forward. Though the ECB is not anticipated to cut rates at their next meeting on November 6, Credit Suisse overnight index swaps are pricing in over 100bps worth of reductions over the next 12 months. Taking into account the dovish prospects for the UK and Euro-zone there are obvious downside risks for the British pound and euro, and until risk aversion starts to fade, these currencies will continue to have bearish potential.


Check out Daily Fundamentals in its entirety for analysis and outlooks on the US dollar, euro, British pound, Japanese yen, and the commodity dollars.

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