However, the Federal Reserve decided to lower interest rates by just 25 basis points and policy makers have cut the benchmark lending rate by 1 percentage point over the past three months as the U.S economy stands on the brink of recession.
Only a minority of the market anticipated a larger reduction in rates but the tone of the accompanying statement seemed to suggest that policy makers still expect the economy to expand next year and are therefore reluctant to aggressively alter monetary policy.
The Federal Open Market committee took the decision to lower U.S interest rates to 4.25% and said that three months of monetary easing should promote “moderate growth”.
Rising energy costs have pushed inflationary pressures to the upside but the U.S economy is slowing to a degree that has seen the Fed drop their assessment that risks to economic growth and inflation were almost the same.
The cautious stance portrayed in the FOMC statement saw U.S stocks and carry trades plummet but the Dollar may continue to make gains in the short-term before further rate cuts are likely in the New Year.
The Euro failed to consolidate on the recent gains made against the majors as reports in Germany showed that investor confidence had dropped by more than initial forecasts in December and reached the lowest level in nearly 15-years.
The ZEW Centre for European Economic Research said its index of investor and analyst expectations dropped to the lowest level since January 1993 while European stocks fell for the first time in five days.
The decline in sentiment is in stark contrast to the Ifo index earlier this month as the losses linked to the U.S subprime mortgage crisis combined with record high oil prices and the strongest Euro in history is hurting companies’ expansion.
The report also showed that investors expect the credit crunch to continue into 2008 and that may keep the ECB from changing monetary policy in the near-to-medium term.
Prior to the FOMC rate announcement, the Pound had continued to make modest gains against the Dollar and by the close of the European trading session, the UK currency looked poised to trade higher for the fourth straight trading session.
The Pound strengthened following a report from the Office of National Statistics, which showed that the UK trade deficit unexpectedly narrowed in October. The gap in goods and services contracted to £7.1 billion compared with a record £8 billion in September following a timely increase in export growth following the Euro’s 7% appreciation against the Pound this year.
The overwhelming strength of the Euro is boosting UK manufacturing and increased overseas demand for British made goods with exports rising 1.8% in October while imports declined 1.9%.
The focus this morning will fall on the UK claimant count while the rate of unemployment may stay unchanged at 2.6% as a strong labour market continues to support the economy.
Data Released 12th December
UK 09:30 Average Earnings (3 Months to October)
UK 09:30 Claimant Count / Unemployment (November)
EU 10:00 Industrial Production (October)
U.S 13:30 Export / Import Prices (November)
U.S 13:00 Trade Balance (October)
Related posts:
- The U.S Dollar remains largely unaffected after the Federal Reserve hold interest rates at 5.25% after 17-consecutive rate hikes since June 2004
- The Dollar remains largely unchanged as the Fed elect to hold U.S interest rates at 5.25% for the second month in succession
- The Dollar falls as the the Federal Reserve elect to hold interest rates at 5.25% for the third consecutive month
- The Pound remains largely unchanged against the Euro as the Bank of England hold interest rates at 4.75%
- The Pound remains largely unchanged despite UK unemployment falling for the second consecutive month in August
