In the build up to the FOMC rate decision last night, the Dollar extended its losses against the Euro and also slumped to 2.0200 versus the Pound amid speculation that policy makers would slash interest rates by a whole percentage point in an attempt to restore some confidence to the market.
The demise of the U.S securities firm Bear Stearns sent shockwaves through the market earlier this week and that news coincided with the Fed’s decision to lower the discount lending rate to just 3.5%.
This was just the latest attempt for the Fed to restore some sense of stability and last night the FOMC actually cut interest rates by 75 basis points, which means the Dollar is now the second lowest yielding currency in the developed world.
Nevertheless, the outcome of the meeting and the Fed’s decision to resist cutting rates by a whole percentage point prompted a 400 point rally in equities while the Dollar made gains against both the Pound and the Euro.
The tone and language used in the accompanying statement suggests that policy makers are still downbeat on the prospects for the economy but the rising inflationary pressures are a major concern.
That sentiment was reflected in the voting pattern of the decision as two members of the FOMC voted for a smaller reduction. Even though the Fed are likely to continue monetary easing over the coming months, the threat of inflation will probably lead to a more conservative series of cuts as the market needs to time to absorb the recent moves.
The Euro has risen to within a whisker of the 1.6000 level against the Dollar this week but the single currency sold off in the aftermath of the FOMC rate decision as the Reserve Bank cut rates by less than anticipated.
Nevertheless, the overall sentiment surrounding the European economy combined with the staunchly hawkish stance of the ECB suggests that this move reflects traders adjusting positions rather than a shift in sentiment.
In a recent interview, the chairman of the Central Bank, Jean-Claude Trichet, saw fit to remind the market that risks to price stability are still the ECB’s chief concern and despite the turbulence surrounding financial markets, the outlook for the Euro-zone is still promising compared to that of the U.S.
The Pound made strong gains against the Dollar yesterday while the UK currency also stemmed any further losses versus the Euro as a report from the Office of National Statistics showed that the UK inflation had accelerated at the fastest pace in nine months.
Consumer prices climbed 2.5% in February, compared with 2.2% the previous month as a significant increase in gas and electricity prices limit the Bank of England’s scope to cut interest rates.
The annual pace of inflation has now exceeded the Bank’s target for five months in a row and the governor of the BoE, Mervyn King, believes that consumer prices will continue to accelerate over the coming months.
The MPC now face a dilemma in balancing the risks of higher inflation against a slowing economy and speculation of further monetary easing has sent the Pound crashing to a record low versus the Euro.
The focus this morning will inevitably fall on the minutes of the BoE’s last policy meeting where the committee are expected to vote 8-1 in favour of holding interest rates steady.
Data Released 19th March
U.K 09:30 BoE MPC Minutes of 5/6 March Meeting
U.K 09:30 Average Earnings (3 months to January)
U.K 09:30 Claimant Count Unemployment (February)
U.K 10:00 CBI Industrial Trends Orders
E.U 10:00 Trade Balance (January)
written by Adam Solomon
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