Forex Investment and Currency Trading

The GBP is the worst performing major currency in the overnight session, with the pound falling sharply in response to a very dovish Bank of England (BOE) inflation report. The BoE said the UK economy was in recession and forecast a sharp 1.8% drop in GDP in Q1 2009. As a consequence, inflation would fall “well below” the central bank’s inflation target by the middle of next year. Gov. King stated a willingness to cut rates again “if necessary” though the very weak message from the inflation report (and today’s soft employment data) seem to make lower rates a certainty. In the wake of the inflation report, the markets are pricing in the risk of a further 100 bps of rate cuts in the next 6 months, with some speculation that the BoE may make another big (100 bps) cut in December. The repo rate stands at 3.00% after the huge 150 bps cut earlier this month and a drop to 2.00% - while perhaps warranted by the domestic situation – would nevertheless be very significant (especially given that there is widespread speculation also that rate cuts may not stop there). The bank’s benchmark rate has never been lower than 2.00% since it was founded in 1694. No surprise then that the GBP is getting crushed; Look for further losses in the near term at least as the market discounts further steep declines in UK rates; Analysts forecast EUR/GBP reaching 0.83 early next year but the technical risk suggests that higher levels than that could be seen more quickly. Looking at levels extrapolated from the old Sterling/Mark chart points to resistance at 0.8250.