Mervyn King and the MPC decided not to dance with Prudence yesterday and instead performed a stunning solo by cutting the base rate by 1.5%. While some commentators had said that a cut in that region was what was needed none actually predicted such an upheaval and that the rate would fall to the lowest level since the mid 50s. All in all the move is being viewed as a positive but not a panacea; the onus now being on the High St. banks to increase lending to the corporate sector and to the mortgage market which we think will happen and hopefully the trickle down of LIBOR increases in the coming days.

Predictions abound at the moment as to how low can they go; we would be happy to suggest the base rate falling to 1.5% by February following consecutive 50bps cuts in the coming 3 months. In the accompanying statement to the decision the MPC basically argued that inflation will take care of itself via the falls on commodity prices and via projected unemployment and as such the focus is growth. The Bank of England was the first major injector of liquidity into the markets via a structured plan and is once again leading the way with drastic rate cuts which has won them plaudits in financial columns this morning.

The ECB’s decision was somewhat overshadowed by the noise from London but they too cut rates by 50bps. In light of the BOE’s move some had believed that the ECB may jump on the bandwagon but Trichet’s more hawkish tolerances held firm although we expect another 50bps slash next month with the market putting an 80% chance on this.

These results obviously contributed to a volatile day’s trading with sterling gaining in the early afternoon as the market looked appreciative of a decisive move. Overnight however GBP has moved lower against EUR and USD but is holding firm against most other crosses. Data today will contribute to the volatility with the focus heavily on the US. Change in Non-Farm Payrolls are predicted at -180k however given the state of recent data we believe that we could see a figure over 200k for the first time since the beginning of this decade. Whether however this is dollar negative is very much up in the air; initial volatility may help GBP but with another poor day forecast for US stock markets as Ford and GM release earnings risk aversion may return and subsequently strengthen the greenback.

Have a great weekend.

Please feel free to contact me (jeremy,cook@worldfirst.com) if you have any questions or thoughts regarding these updates or if you are interested in a particular event in the calendar. If you would like to discuss your foreign exchange requirements, please contact our:

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Disclaimer: The above comments are only our views and should not be construed as advice. You should act using your own information and judgement. Although information has been obtained from and is based upon multiple sources the author believes to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute the author’s own judgement as of the date of the briefing and are subject to change without notice.

Any rates given are “interbank” i.e. for amounts of £5million and thus are not indicative of rates offered by World First for smaller amounts. E&OE. Definitions of jargon/market terms can be found in our Glossary of Foreign Exchange Terms.