The Pound soared over 200 points on the announcement by U.K. Chancellor Darling that the government will provide 25 billion pounds for eligible banks including Abbey, Barclays, HBOS, HSBC, LLoyds TSB, Nationwide and RBS.
Talking Points • Japanese Yen: USDJPY Falls Below 100.00 • Pound: UK Bank Bailout Fails To Lift Pound • Euro: Economy Contracts in 2Q • US Dollar: Housing Data On Tap British Pound Falls Despite U.K. Bank Bailout, Will BoE Cut Rates? The Pound soared over 200 points on the announcement by U.K. Chancellor Darling that the government will provide 25 billion pounds for eligible banks including Abbey, Barclays, HBOS, HSBC, LLoyds TSB, Nationwide and RBS. However, the GBPUSD ran into resistance at 1.7650-yesterday’s high and gave back all of its gains, as the prospect of a BoE rate cut weighed on the pair. The encompassing effort by the BoE was a necessary action in the same vain as the U.S. rescue package, as it was needed to stem the current crisis and restore confidence. The U.K. government will provide tier 1 capital through preference shares. Funds of at least GBP 200 bln will be available to banks through the BoE's Special Liquidity Scheme and GBP 25 bln is available to eligible institutions. Chancellor Darling also announced that more actions would be taken as needed and that the administration is committed to stabilizing the financial markets. The move was necessary to stop the current run on U.K. banks which threatened failures similar to those saw in the U.S.. Traders attention has now turned toward the BoE’ rate decision tomorrow, where many expect the central bank to cut rates by 25 bps. Although given the current crisis and the downward spiral of the British economy a 50 point cut is a strong possibility. Therefore, we may se the Sterling trade heavy going forward. The Euro traded choppy throughout the overnight session as traders were unsure of the ECB’s next move, despite a slowing economy. The final readings of 2Q GDP for the Euro-zone confirmed preliminary estimates that the economy shrunk 0.2% and is headed toward a recession. Growth in the third quarter is anticipated to have contracted as well, which would equal a technical recession. Declining capital investment and consumer spending has plagued the region and is expected to continue as confidence has fallen sharply over the past few months. The stalling economy and current credit crisis has raised expectations that the ECB will cut rates at their next policy meeting. The calls for a coordinated rate cut continue, but with the BoE expected to cut tomorrow and the Fed at its next meeting we may see the Trichet wait until the next scheduled decision. If there is any chance of a pre-emptive move, it will come following this weekend’s G7 meeting. Therefore, we could see the Euro weaken heading into the weekend if traders anticipate easing is forthcoming. Risk Aversion continues to dominate markets as the USDJPY fell below 100.00 for the first time since March 21, 2008 following the bailout of Bear Stearns. Following yesterday’s drop in U.S. equities, we are seeing similar weakness in Asian and European markets with the Nikkei down over 900 points, its biggest loss since 1987. Yen crosses will continue to find support as the global economy contracts as the current credit crisis stifles growth. However, be conscious of potential action from the upcoming G7 meeting that could improve sentiment. After Chairman Ben Bernanke all but confirmed a rate cut at the FOMC’s next policy meeting the dollar lost some momentum against the Euro and saw further weakness against the Yen. However, the hawkish tone to the comments has kept the greenback firm, as the MPC leader mention that inflation concerns are still relevant signaling that further easing wouldn’t come before the scheduled decision. Hopes were growing that the central bank would take preemptive actions following its efforts to backstop the commercial paper market. Today’s calendar will provide further evidence that the housing market has failed to bottom as August pending home sales and September housing starts are expected to have continued to decline. The declining interest rate expectations may lead to dollar weakness, but with global risk aversion permeating markets the demand for the safety of U.S. treasuries could lead to support for the greenback. Will The EUR/USD Fall to 1.4000? Join us in EURUSD Forum Related Articles: The US Economy Faces Substantial Challenges Ahead.