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BoE Cuts, Dollar Tumbles, Euro Soars

Thu, Apr 10 2008, 12:13 GMT
by Ashraf Laidi

CMC Markets

The interest rate decisions of the Bank of England and the European Central Bank were meant to take center stage, but it was accelerating dollar sell-off across that dominated throughout Asian trade and the morning European session, hitting a new low against the euro at $1.5912. Record highs in oil have led the rally in metals all at the expense of the greenback. There was no surprise in any of the two interest rate decisions as the BoE cut rates by 25 bps to 5.00% and the ECB held at 4.00%.

As ECB president Trichet prepares to speak at the press conference at 8.30 am, we will obtain the weekly jobless claims will draw attention are expected to have dropped to 385K after last week’s 38k jump to 407k, which was the highest reading since Sept. 17, 2005 (week following Hurricane Katrina). The less volatile 4-week MA had jumped by 15.8K to 374.5K, highest since Oct. 2005. Continued claims rose to 2.937 mln, the highest since July 17, 2004. Markets await the status on what the Labor Department referred to as seasonal difficulties arising from the Easter Holiday. Yet even if previous and latest drop back below the 400K handle, the 390K territory remains consistent with the newly hit 5.1% unemployment rate in the March report. terrmay be revised down to the 390sKin the following week, but the climb remains consistent with recessions than the 360-70s seen earlier.

Also at 8.30 am EST is the US February trade balance expected to have improved to $58 billion from $58.2 billion.

Sterling to Deepen Post-BoE Cut Losses

The Bank of England made the widely expected decision to reduce interest rates by 25 bps to 5.00%, the third rate cut of the current easing cycle, which began in December. . Sterling hold steady after the Monetary Policy Committee stated inflation would remain high before easing later in the year on spare capacity. The MPC added that sterling weakness will support exports, making yet another reference to the weak currency. MPC officials have often talked down the pound, either as a forecast or a theoretical statement. High inflation has served as an obstacle to the hawks in the Monetary Policy Committee made as price growth hit a 9-year high of 2.5% in February. Nonetheless, BoE Governor Mervyn King has repeatedly stated in past testimonies his forecast for a retreat in inflation toward the latter part of the 2-year projection period.

Since assuming independence in 1997, the BoE led an active monetary policy, displaying more frequency in policy cycle shifts than its US , Japanese and Eurozone counterparts. It took five months for the central bank to shift from rate hike in July 2007 to a rate cut in December, while it took 15 months for the Fed to shift from the final tightening of 2006 to the rate cut of last September. The ECB also took more than a year to shift from one cycle to another. Such frequency in policy shifts is a reflection of the size of the economy, in contrast with the US , Japan and the Eurozone. This aspect may also help explain the 75-100 bps in further interest cuts priced in for the BoE later this year.

Despite the emerging damage in the dollar, we expect sterling’s indirect strength to taper off and push back cable towards $1.9740. Key support stands at $1.97. We continue to deem any bouts of sterling strength as a manifestation of USD weakness, which makes it a bear trap for GBP. Upside seen capped at 1.9840.

Opportune Euro Soars to Fresh Record Highs

USDJPY to Break Under 100

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Published on  Thu, Apr 10 2008, 12:16 GMT