2 reasons why the BOE may cut rates
Will the Bank of England
(BOE) cut rates once more at this Thursday’s MPC meeting? A week ago
this question would have been easily dismissed by the FX market as almost all
participants were universally convinced that last months cut from 4.75% to 4.5%
was a one-off event. Although consensus expectations still hold fast to the
notion that rates will remain unchanged, tonight’s economic data should provide pause
to cable longs.
First, the BRC Retail Sales monitor reported a
decline of —1.0%, the fifth monthly drop in row. Secondly, Industrial Production
contracted by —0.3% on a month over month basis and —1.6% on a year over year
comparison. Both the consumer and industrial sectors are signaling an inexorable
slowdown in the UK economy. The BOE, however has been reluctant to further
loosen monetary policy for fear of reigniting the housing bubble which has only
recently shown signs of stabilizing. FX traders, too took tonight’s data in
stride as well, as cable initially sold off on the news but quickly rebounded to
retake the 1.8400 level. Nevertheless, if BOE does not react soon, it risks the
possibility just like the Fed of causing a recession due to its restrictive
monetary posture. Either way, unless UK data shows signs of improvement or the
market sees another wave of dollar bearishness, any rally in cable is likely to
be contained.
Meanwhile in the Eurozone both the euro and the
franc retraced part of their rally against the dollar on a report by Bloomberg’s
John Berry that Fed might indeed raise rates another 25 basis points despite the
economic havoc caused by Katrina. Mr. Berry noted that the restitution of power
in some parts of the region as well as restart of refining capacity may convince
the Fed that the economic impact of the hurricane may be relatively minor. The
critical question for the market however is whether the Fed hike if it is indeed
enacted, could further curtail consumer spending as US retailers gear up for the
crucial Christmas selling season. As we noted yesterday, the euro rally is
certainly due for a rest, but unless US economic data can demonstrate material
improvement the power is likely to lie with the dollar shorts.
Boris Schlossberg serves as Senior Currency
Strategist with Forex Capital Markets in New York, the largest retail forex
market maker in the world. He is a monthly contributor to SFO Magazine with
articles focused on understanding proper risk management, trader psychology and
true market structure. He is also a featured expert at
www.fxstreet.com and a frequent
commentator for the Marketwatch From Dow Jones Currency and Bond Report
sections.
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