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Plunging Pound Requires 50−bp Fed Cut

Mon, Sep 17 2007, 12:01 GMT
by Ashraf Laidi

CMC Markets

Global stocks sell off across the board while sterling resumes its broad declines as shares in UK mortgage lender Northern Rock lose more than 30% on Monday after falling 31% on Friday following news that it sought emergency funding from the Bank of England. Although depositor’s withdrawals have accounted for 8% of total deposits, fears of more withdrawals will trigger a “run on the bank” and may weigh on other lenders.

The Northern Rock developments are the latest example of US sub-prime mortgage troubles extending overseas and may mean that the Bank of England could be forced to make a 180 degree turn in its restrictive monetary policy, cutting interest rates in as early as this quarter after last raising them in June. A rate cut this year would be the fastest policy reversal in the 10-year history of the independent central bank since the 4-month gap between the June 1998 rate hike and the October 1998 rate hike. A rate cut will mean that the highest interest rate in G10 nations would be curtailed, triggering further losses in the high yielding pound..

Reduced risk appetite is largely hurting sterling crosses, while the yen is accumulates gains as world bourses extend their losses.

At 8.30 am is the September Empire State manufacturing survey expected at 18 from 25.1. The survey’s components have remained mostly on the strong side in recent months, shrugging the national slowdown of the past 3 months. Considering recent strength, a decline below 15 is likely to trigger fresh dollar losses ahead of Tuesday’s FOMC decision.

A scheduled meeting at 12.45 pm between US Treasury Secretary Paulson and his UK counterpart Alistair Darling is likely to produce the usual words of assurances to financial markets, reiterating authorities’ readiness to provide liquidity where needed. But markets will look for the magnitude of rate cuts from central banks rather than the volume of reassuring language from finance Ministers.

Falling sterling requires 50-bps Fed move

Euro retreats vs. USD, soars vs. GBP

Yen flexes muscles on falling markets, eyes 114.30

CAD seen limited at 1.0250

Published on  Mon, Sep 17 2007, 12:01 GMT