This prompted a swift move from the Federal Reserve Bank, who slashed their base

interest rate by 0.75%, in an attempt to instil some confidence. The cut to 3.5% was the

biggest in 25 years and the stock markets bounced back strongly on the

announcement. However, shares remain edgy and volatile as concerns remain about

the US economy.

The outlook for the UK is not much brighter. Analysts predict that the economy will go

through a significant period of weaker growth, and the housing market will lead the

way. Already we have witnessed recurring doses of poor housing data. This morning’s

Hometrack survey showing prices falling for the fourth consecutive month and Deloitte

Economic review revealing prices have fallen by up to about 5% already this year.

Last week, sterling was aided by comments from the Monetary Policy Committee’s

Sentance, who warned that the MPC should not ignore inflation.

Unfortunately this hawkish rhetoric had been lost on the wind by Friday and the

weekend, when comment from David Blanchflower, another MPC member, cautioned

of a downturn. Blanchflower claimed,” The state of the housing market was worrying.

Consumer confidence is low in the UK. Interest rates are restrictive at their current

levels and that is why I have been voting for cuts.”

Fears that the UK will follow the US into recession, if America falls, have prompted

speculation that the Bank of England are likely to cut rates more aggressively than was

originally thought. This will continue to keep the focus on monetary policy decisions

and any signs that increasingly poor data will force the committee’s hand.

In the mean time, the market will hold its breath while awaiting Wednesday’s Federal

Bank decision.

The main focus will be the FOMC rate decision on mid week. The Fed are likely to

ease policy further but whether this is 25 or 50 basis points is the question. A cut to

3.00% would be slightly more than the consensus is looking for and would please the

equity markets. However, dollar will most probably come under further pressure with

that large a move and GBPUSD may visit the 2.00 level, despite sterling’s comparable

weakness.

The UK’s major releases come in the form of housing, consumer confidence and

mortgage data. It would come as a shock to the market if these come in above

expectation. So the risks continue to lie to the downside especially against the euro.

anytime regarding these briefings, if you have any questions or thoughts on them, or if you are

interested in a particular event in the calendar.

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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

authors own judgement as of the date of the briefing and are subject to change without notice.

Any rates given are interbank and therefore for amounts of £5million and so are not indicative of

rates offered by World First for smaller amounts.

GBPUSD, move as any combination of two of these rates must produce the third in order to satisfy a

condition known as No Arbitrage. If there are movements in two markets, then the third must move

deterministically. Also knows as triangulation.

higher yield economy (Australia). This yields a certain profit unless the interest rate differential narrows, or

the exchange rate moves such that it costs more to buy the currency back.

Macroeconomic models (such as eCIP).

elements like energy and luxury consumption leaving the ‘boring’ elements like utility bills and food.

[Quotes from BoE governor Mervyn King]

Interest Rate Traction: Although there is a group of people who announce an interest rate, it has to feed

through the economy through some very complex and poorly understood channels. Once rate hikes are

having an effect on inflation and long term yields it is said that they are finding traction with the economy.

who are not employed.

Participation rate: The percentage of the population of working age in the labour force.