The Pound dropped over 300 points on the news that U.K. banks maybe seeking help from the government. The GBPUSD would fall as to 1.7319 from 1.7650 before finding support as rumors that the Chancellor Alistair Darling and BoE governor Mervyn King met with the leaders of Royal Bank of Scotland and Barclays and have discussed investing 45 billion pounds.
Talking Points • Japanese Yen: BoJ Leaves Rates Unchanged • Australian Dollar: RBA Surprises With 100 Point Rate Cut • Pound: UK Banks Supposedly Seeking Government Help • Euro: German Factory Orders Surprise, Will ECB Cut Rates • US Dollar: Fed Looking To Back Stop Commercial Paper Pound Sinks On Rumors of UK Banks Seeking Help, Is A Coordinated Rate Cut Ahead? The Pound dropped over 300 points on the news that U.K. banks maybe seeking help from the government. The GBPUSD would fall as to 1.7319 from 1.7650 before finding support as rumors that the Chancellor Alistair Darling and BoE governor Mervyn King met with the leaders of Royal Bank of Scotland and Barclays and have discussed investing 45 billion pounds. Meanwhile, industrial production fell 0.6% in August, the fourth straight month of declines, as the economy marches toward a recession. The fall in industrial production demonstrated the impact of the global slowdown as petroleum and metals production fell 0.5% and 0.6% respectively. However, the news was overshadowed by the speculation that the U.K. government will have to come to the aid of the country’s major banks which is perpetuating the fears generated by the credit crisis. The banks are anticipated to need to pay 54 billion pounds by March 2009, which it may not be able to meet without government funding. The BoE is expected to cut rates by 25 bps at Thursday policy meeting which will continue to weigh in the pound. Indeed, credit overnight index swaps are pricing in a 165 bps worth of cuts over the next 12 months. Therefore, a 50 point rate cut is not out of the question considering current market conditions. . Markets have been calling for a coordinated rate cut from the major central banks. Although, we may not see a simultaneous effort, global policy makers may follow the RBA’s lead, which surprised with a 100 point reduction last night. The central bank brought their benchmark rate to 6.00%, which is the lowest since November 2006. Focused has turned to the ECB and if President Trichet will finally abandon his focus on price stability and lower rates. The MPC leader stated yesterday that the central bank is ready to provide liquidity as long as necessary. This follows his testimony that policy makers considered a rate cut at their last rate decision. Credit Suisse overnight index swaps are pricing in 129 bps worth of cuts over the next twelve months, signaling that easing from the ECB may happen at anytime. The Euro traded choppy throughout the overnight session as the decreasing interest rate expectations were offset by a rebound in German factory orders which rose 3.6% in August against expectations of a 0.5% improvement. Speculation is that the Fed will take measures to backstop the commercial paper market as their latest effort to lubricate credit markets. The market has tried up making it difficult for companies to finance their businesses. The $700 billion bailout plan has become old news before the plan has begun to be implemented as panic continues to grip markets. The current crisis is being called the Great Depression 2 and the sharp drop in stocks yesterday underlined the fear in the markets. Therefore, many expect Fed Chairman Bernanke to cut rates by as much as 50 bps in order to bring down credit costs. Fed funds futures are pricing in a 44% chance of a 50 point cut at the central bank’s October 29 meeting. Expectations that the MPC may act before the scheduled meeting may start to weigh on the dollar. However, as long as traders seek the safety of U.S. treasuries we will see the greenback’s strength continue. The FOMC meeting will be released today from their last meeting, which is traditionally significant event risk for the dollar. However, giving the historic events since then it may be a non-event. Will The EUR/USD Fall to 1.4000? Join us in EURUSD Forum Related Articles: EUR/USD Falls Further As The Credit Crisis Reaches Europe.