Bank of England Concludes Easing Cycle After Cutting to 0.50%, Policy Makers to Spend GBP 75B

Talking Points

• Japanese Yen: Holds Short-Resistance At 99.50
• Pound: Bank of England Concludes Easing Cycle, MPC to Adopt Quantitative Easing
• Euro: GDP Falls Slightly More Than Expected, ECB Rate Decision Lies Ahead
• US Dollar: Continue Claims and Factory Orders on Tap

Bank of England Concludes Easing Cycle After Cutting to 0.50%, Policy Makers to Spend GBP 75B

The British Pound fell lower after rising to a high of 1.4228 during the Asian session as deteriorating fundamentals weighed on the outlook for further growth, and continued to trail lower following the 50bp rate cut by the Bank of England as the central bank continued to hold a dour outlook for growth and inflation. The central bank said that it expects price growth to fall below the 2% target in the second-half of the year, and reinforced expectations for a global recession as they saw continued weakness in world activity. Meanwhile, as the BoE concludes its easing cycle, Governor Mervyn King said that the central bank will buy 75B pounds of assets ranging from corporate bonds to long-term Gilts to manage monetary policy going forward, and will push for additional spending as he expects economic activity in the first quarter to contract at a similar rate that we’ve seen in the fourth quarter.

On the economic front, the HBOS house price index fell 2.3% in February after rising 2.0% in the prior month, while the annualized reading showed that property values slipped 17.7% from the previous year, which was slightly higher than the forecast for a 17.8% drop in prices. Meanwhile, a separate report showed that new car registrations fell 21.9% from last year, after plunging 30.9% in the previous month, and the data continues to reflect a dour outlook for private spending as households face a weakening labor market.

The Euro pared overnight gains to reach an intraday low of 1.2546 as the economic docket showed a worsening outlook for the region, and expectations for further easing by the European Central Bank may continue to weigh on the exchange rate as economists project the economy to face its worse economic slump since World War II. The preliminary GDP reading for the Euro-Zone showed that the annual rate of growth fell 1.3% during the fourth quarter, which was slight lower than the initial forecast for a 1.2% contraction in growth, while the breakdown of the report showed that private-spending dropped 0.9% after growing 0.1% in the previous quarter. In addition, business investments plunged 2.7% after falling 0.6% in the third quarter, and conditions are likely to get worse as trade conditions falter. Nevertheless, as ECB President Trichet remains reluctant to over shoot the interest rate, commentary following the rate decision is likely to influence the outlook for future policy but, as households and businesses remain pessimistic towards the economy, policy makers could face increased pressures to utilize all of its available tools to steer the nation out of a deepening recession.

The U.S. dollar pushed higher against all of its major currency counterparts during the overnight session however, as the economic docket is expected to show a rise in continuing claims for jobless benefits, expectations for a dismal Non-Farm Payrolls report could weigh on the greenback over the next 24 hours of trading. Furthermore, factory orders are expected to fall another 3.5% in January, which is likely to drag on the outlook for future growth, while a rise in mortgage delinquencies is likely to reinforce fears of a deepening recession as households continue to face financial uncertainties paired with a weakening labor market. Moreover, U.S. Treasury Secretary Tim Geithner is schedule to testify in front of the House Budget Committee, while Fed Vice-Chairman Donald Kohn will speak before the Senate Banking Committee, and the comments from the government officials also presents event risks for the greenback as investors remain skeptical of Obama Administrations efforts to stimulate the economy.

DailyFX

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