Pound gains as BoE closes in on rate floor
The British pound continues to gain strength against both the U.S. dollar and the euro as the Bank of England slashed a further half percent of its key lending rate leaving rates at 1%. Never in its entire 314-year history has the Bank trawled monetary policy at such low depths. The pound’s reaction is similar to that seen earlier this week by currencies whose central banks slashed rates. The Norwegian krona and the Australian dollar have both gained in the aftermath of those decisions. The ECB elected to maintain its stance having hinted earlier this week that it preferred to wait until March before easing policy again.
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While Thursday’s weekly reading of U.S. jobless claims rose to an unhealthy 626,000 the pound slipped back beneath $1.4615 to $1.4550 while against the euro the pound was trading at 87.73 per euro - a gain of a penny since Wednesday’s close. ECB president Trichet duly noted in the traditional post-ECB meeting press conference that inflationary pressures in the Eurozone were diminishing, which is comforting to industry suffering from cratering demand in every conceivable country and time zone. They can sleep safe in the knowledge that a 25 basis point reduction next month is safely in the bank.
The euro slipped against the dollar following those comments but possibly more due to the claims data, which heralds an absolutely awful employment report on Friday from which we’ll likely learn that the United States is running with an unemployment rate in excess of 7.5%. The $1.2775 rate on the euro exhibits a resumption of risk aversion, while the dollar’s gains against the yen seem to show the dollar flexing its muscles a little as the Japanese economy weakens further.
The commodity dollars are mixed today with the Aussie stronger and the Canadian weaker against the U.S. dollar. One Australian dollar buys 64.66 U.S. cents today up from 66.35 one day ago. Meanwhile the Canadian dollar is unchanged at $1.2325. The Aussie took its cue from optimism spurred by a rising Baltic Dry Index, a measure of shipping line activity – higher for the past week. Reports of declining stockpiles of commodities in China also spurred appetite for the Aussie unit given the fact that the economy is reliant on exports for 60% of gross domestic product. Some analysts believe that the Aussie will be a big beneficiary of the U.S. stimulus package should it be seen strong enough to spur global growth.
Andrew Wilkinson
Senior Market Analyst
ibanalyst@interactivebrokers.com
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