Forex Investment and Currency Trading

If you are a central bank and you are not cutting rates big time, the markets are liable to be disappointed. After aggressive rate moves from the RBNZ, Riksbank and BoE over the past 24 hours (the BoE repo rate at 2.00% equals the all time low), the onus was squarely on the ECB to deliver the big 75bps rate cut we saw this morning. The economic justification is there – weak GDP data today confirmed the 0.2% decline in Q3 growth and staff forecast updates will underscore the weak outlook – and the sharp fall in inflation (as oil prices plunge) allowed even the hawks to switch gears to a more pragmatic rate stance.

EUR/GBP made a new high before the BoE rate announcement but eased back ahead of the rate cut itself and may have set a short term high just under 0.87; there is still a chance of a modest buy-the-fact rally in the pound, with the BoE rate move well factored in though the BoE’s suggestion that further weakness in the pound will help cushion the economy from the impact of the global economy suggests no resistance from the authorities to further GBP depreciation (and also indicates that this is not the time that policy makers are seriously considering locking the GBP into the EUR).

For the rest of the markets today, big rate cuts around the world may provide some relief against safe haven flows and cheer up equities. USD/JPY above 93.15 intraday may provide some upward impetus for this market and lift the JPY crosses broadly; EUR/JPY’s bounce from in the 116.50/60 area suggests a modest leg up for EUR/USD in the near term also. More broadly, analysts still look for the USD to give up a lot of the gains it has accumulated over the course of the past few months versus
the bulk of the majors; with short term USD-supportive factors – deleveraging, position adjustment and liquidity-driven demand – liable to fade in to next year and the US looking at recession, zero interest rates (possibly quantitative easing) and a blow out in public debt, the USD will weaken in the medium term.