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U.K. Economy to Contract Further Despite the Extraordinary Efforts by the BoE

Wednesday, 10 December 2008 10:46:42 GMT  |  David Song, Currency Analyst

The NIESR statement continues to reflect a dour outlook for the U.K. as credit conditions remain far from normal, which could lead policymakers to ease policy further over the coming months in order to avoid a deep and severe recession.

Fundamental Headlines

• AIG Faces $10 Billion in Losses on Bad Bets – Wall Street Journal
• Rio Tinto to Cut 14,000 Jobs – Wall Street Journal
• US carmaker bailout negotiations near close – Financial Times
• Citigroup to Cut 1,000 Jobs at Japan’s Nikko Cordial – Bloomberg
• China’s Exports Decline for First Time in 7 Years – Bloomberg

• GBPUSD – The growth outlook for the U.K. is likely to deteriorate further as the National Institute for Economic and Social Research expects the economy to contract 1.0% in the fourth quarter. Economic activity has weakened considerable throughout the second quarter as Europe’s second largest economy heads into its worst recession in over a decade, when the economy contracted 1.2% in 1990. The NIESR statement continues to reflect a dour outlook for the U.K. as credit conditions remain far from normal, which could lead policymakers to ease policy further over the coming months in order to avoid a deep and severe recession. Meanwhile, falling commodity prices paired with the considerable slowdown in the economy has raised the risks for deflation, which could lead the Bank of England to lower the benchmark interest rate further as they carry out their mandate to ensure price stability. Discuss the topic and your trade ideas in the GBP/USD Forum.

• EURUSD – The German wholesale price index fell 3.3% following a 1.5% decline in October, which lowered the annual rate to -0.8% from 3.6%. The data continues to support the European Central Bank’s dovish outlook for inflation, which would allow policymakers to ease policy further as price pressures alleviate. As the ECB continues to carry out its primary mandate to ensure price stability, increasing risks for deflation could force the central bank to lower borrowing costs even further over the coming months in order to meet the 2% target for inflation. Discuss the topic and your trade ideas in the EUR/USD Forum.

• CHFUSD – The Swiss ZEW investor confidence survey improved to -76.2 from -88.5 in November as a result of the extraordinary efforts taken on by the Swiss National Bank. The SNB unexpectedly lowered the 3-month target LIBOR rate by 175bp over the past two months as policymakers attempt to stave-off a severe downturn in the economy, which has raised bets for another rate cut at tomorrow’s policy meeting as the central bank expected economic growth to contract in 2009. For more news and resources, visit the new Swiss franc Currency Room.

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