[B]Talking Points
• Japanese Yen: Continues to hug 106.50
• Euro: Holds 1.4600 Factory orders weak
• British Pound: BoE Capitulates and Cuts
• US Dollar: Pending Home sales on tap[/B]
As expected the Bank of England cut its short term rates by 25bp to 5.25% but the tone of is post announcement statement suggested that it may ease further prompting traders to continue selling sterling after the news release. The BoE stated that “The Committee needs to balance the risk that a sharp slowing in activity pulls inflation below the target in the medium term against the risk that elevated inflation expectations keep inflation above target.”
It was perhaps the specific wording of “sharp slowing in activity” that elicited the most concern from the market as it suggested that the UK central bank was beginning to acknowledge the seriousness of the deceleration in the country’ economy. Tonight’s Manufacturing and Industrial Production data did not help matters as it registered yet another contraction, declining for the third month out of four.
The BoE paid lip service to inflationary pressures and even suggested that a lower pound may lead to higher import prices, but the overall message of the communiqué clearly indicated that the MPC’s policy focus was shifting from price pressures to concerns about future growth and as a result traders sold cable on the assumption that more cuts will be coming in the near term.
MPC grudging acceptance of the global economic slowdown should serve as an interesting contrast to ECB’s unrelenting focus on price pressures. ECB chief Jean Claude Trichet has been unapologetically hawkish, but given the fact that the latest data from the EZ is beginning to signal similar type of slowdown dynamics, traders will want to see if Mr. Trichet may begin to temper his views.
The ECB is not prone to sudden changes and therefore it is probable that Mr. Trichet may stick to his well worn script. We have long argued that ““For the time being the improving labor markets allow Mr. Trichet and company to remain unapologetically hawkish, but should employment begin to slow or worse contract, the pressure on the ECB to ease will become enormous.” The question ahead is whether the ECB it its intransigence may be too late to act.
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[B]To discuss this article please contact Boris Schlossberg, Senior Curency Strategist: [/B][email protected]