Market Commentary – 04/11/08 – Simon Eastman – Senior Broker

The past few days trading have been dictated by speculation over UK interest rates. Due to the current economic climate and fears of a deep recession, markets have been calling for an interest rate cut when the Bank of England meets this Thursday.

Gordon Brown requested drastic action by the governor Mervyn King to help bolster the flagging economy and the markets has widely expected another 50 point cut in rates, from 4.5 percent to 4 percent.

Yesterday exchange rates were affected very little by the purchasing managers index figures which showed the UK manufacturing sector contracted for the sixth consecutive month as demand for products both here and from abroad tipped the sector into recession (Recession is signified by two consecutive quarters of negative growth).

During afternoon trading the tables turned as the pound took a battering across the board. The cause, market speculation of a 1 percent cut in interest rates rather than just a 50 point cut. The pound dropped 1.5 percent against the euro and at one point was down 3 percent against the US dollar, 3.5 percent against the Canadian dollar and over 3 percent against the Australian and New Zealand dollars.

Although some analysts in the market are not putting the pounds weakness down to the chance of a cut but more to the lack of lack of decisive action by the central bank in helping the economy.

"There's been a lot of apprehension ahead of the BoE meeting, and in our view with good reason," said Robert Minikin, senior FX strategist at Standard Chartered. "It's the sluggishness of the policy that's been affecting sterling. The problem is not whether they move 50 or 100 basis points; the problem is that they should have been easing aggressively, probably since early 2008," he added.

So with the US cutting their interest rates last week by 50 points, the Reserve Bank of Australia cutting rates by 75 points today, the markets now await Thursday for interest rate decisions by the Bank of England and European Central Bank. Cuts should help to boost the economy but whether more will be needed will become apparent in the coming weeks.

If you are in the process of buying a property abroad these uncertain volatile currency markets could unravel your plans so speak with a Currency Index broker today to discuss the options available to you, like a forward contract, used for eliminating the market risk.

If you have any question relating to the content of the above article or for some friendly guidance on your upcoming currency purchase please contact Simon Eastman, Senior FX Broker at Currency Index on 020 7903 5444 or email simon.eastman@currencyindex.co.uk.