Aggressive Rate Cuts Set The Tone In Already Vulnerable Market
Market Highlights
BOE in the spotlight as pressure mounts on government
Sterling went through an extremely volatile week and still ended up on the downside. The pound took some early gains last week after poorer then expected GDP data from the US. However this move was on the back of EUR/USD breaking through the significant level of 1.30. The markets have been looking ahead to the interest rate decision this week. This could bring another aggressive cut from the Bank of England. Whilst it is generally seen as a negative, it could coincide with the government’s stimulus package released last week. This could be taken as a positive step in helping the UK get through the recession. However an industry association has warned that the lack of credit for UK business threatens the worst recession in 20 years for the manufacturing sector.
Euro rally short-lived as Germany crumbles
The Euro was by far the biggest gainer last week until Fridays business confidence data sunk it lower. No sooner had it hit the 1.30 mark it took a nose dive back towards 1.27. This confirmed further that Germany’s struggle is deepening with exports shrinking and GDP falling in to negative figures. The ECB will be in the spot light next week ahead of the rate decision. A modest 50 point cut has been priced in and this could lead to the currency holding the highest interest rate of the majors. In our view this will be Euro positive with some seeing the Euro strengthening by nearly 3% in the first 3 months of next year. However the ever intriguing press conference after the rate decision will be watched with as much interest as ever.
Dollar still dominates bearish market
The Dollar halted it biggest weekly loss against the Pound since January 2006 as stocks declined and reports added to evidence the global credit crisis is hurting others just as much. Even with weak GDP figures amongst a host of poor data the dollar is holding ground. Oil production has been lowered dramatically as its still hovers around the $50 a barrel mark. There are still real fears of demand around global recession and this has kept the dollar steady. The dollar could make further gains next week as other major central banks look to cut rates. There are also key data releases which include ISM's and more importantly the ever volatile non farm payrolls. We expect dollar gains to be limited by this data as the week progresses.
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