Bank of England dropped the benchmark UK interest rate to 1.5% easing by 50bp as expected. The Monetary Policy Committee noted that the sharp drop in the pound provided additional stimulus to the UK economy tempering the need for more drastic rate cuts at the present time. The Central Bank acknowledged the severity of the UK recession stating that business and consumer confidence have declines markedly while noting that output is likely to drop sharply in the first half of 2009.
Cable rallied strongly on the news shooting past the 1.5200 level in the immediate aftermath of the release. Most traders anticipated the 50bp cut and were relieved to see the BoE simply match expectations instead if easing more aggressively. Only a few weeks ago the consensus market call was for a full 100bp cut from the BoE, so given today's more modest response the news can be viewed as victory for pound bulls.
EUR/GBP which registered a parabolic move at the end of 2008, mostly on expectations of UK rates sinking to 1.00% continued to correct its rally dropping below 9000 level after the announcement. The pair is likely to fall further given the weakness in overnight German trade balance data and the very sharp contraction in factory orders.
Although the ECB has been the only G-4 central bank to resist the move below 2% in response to the growing global economic recession, the currency market is quickly coming to the conclusion that European monetary policy makers will have no choice but to relent on their uber-hawkishness stance sooner rather than later. As result the euro will begin to feel the full weight of adjustment in interest rate expectations. In the meantime the pound should benefit on are relative basis as its yield will remain above 1% for the time being stoking further decline in EURGBP.