British Pound Tumbles Despite Hawkish Commentary And Rebound In Risk Appetite

[DailyFx]

The UK has a significant stake in the outcome of the financial market rescue plan in the US. While the details are certainly not expected to help the European economy directly, the stability proffered to the global credit markets could quite possibly help avert a severe recession.



Currently, the UK is on track for its first recession since the early 1990s; and a plunge in the housing market and contraction in consumer spending are leading the way. As long as financial turmoil freezes credit, rising default rates and expensive mortgages will prevent a recovery in the real estate market and British consumers (one of the most indebted peoples in the industrial world) will have to throttle back on spending. Therefore, as market-wide risk appetite responds to the details of the plan that makes it through Congress, the pound will respond as fundamental market participants weigh the ultimate impact on the ailing UK economy. Another direct concern for sterling traders during this period of financial uncertainty is the outlook for monetary policy. Overnight index swaps are pricing over 100 basis points of easing from the MPC through the coming year. However, the BoE has held firm on keeping rates at 5.00 percent. Adding to the hawkish front today, committee member Kate Barker expressed her concern over inflation at a decade high – though she did remark that a sharp drop in growth could lead the to inflation to undershoot the central bank’s target going forward. Despite Barker’s (and many others’) inflation warnings though, the market still sees cuts.