gbp fundamentals

Euro and British Pound Outlooks Hinge Upon ECB, BOE Rate Decision - What Will They Do?

Wednesday, 03 December 2008 23:22:56 GMT  |  Terri Belkas, Currency Strategist

European Central Bank - A record drop in Euro-zone CPI and rising unemployment leaves the odds in favor of rate cut by the European Central Bank on Thursday at 7:45 ET. In fact, Credit Suisse overnight index swaps are now fully pricing in a 50 basis point reduction by the ECB, and a 40 percent chance of an even more aggressive 75 basis point cut. Meanwhile, a Bloomberg News poll shows that economists expect the former. This easily leaves the decision as one of the most important pieces of event risk this week, but traders will also have to look out for comments by ECB President Jean-Claude Trichet during his post-meeting press conference. Mr. Trichet is one of the most opinionated central bank chiefs around, and suggestions that recession will last longer than previously expected in the Euro-zone has the potential to lead the euro far lower.

Bank of England - The British pound could pull back even further this week as Bloomberg News is forecasting that the Bank of England will cut rates by 100 basis points at 7:00 ET on Thursday. This is well within the realm of possibilities since the UK has already tipped into recession and the BOE thinks that things will only get worse. Monetary policy action 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. Nevertheless, as we saw with the Australian dollar and the Reserve Bank of Australia’s larger than expected 100 basis point cut on Monday, a currency can actually gain if the central bank suggests in their policy statement that they will leave rates unchanged. As a result, traders should watch the BOE’s monetary policy statement closely.

Related Articles: EURUSD - Trading the ECB Interest Rate Decision, British Pound Could Rise Even If the Bank of England Slashes Rates

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