Rates Weigh on Pound |

Rates Weigh on Pound

By Humphrey Bo | February 5, 2009

London: Another rate cut? How well has previous cuts moved the economic barometer favorably? Anticipated interest rate cut by the Bank of England is weighing heavily on the pound in early morning trades. If this cut becomes a reality, it would make UK interest rates the lowest in the BoE 300 years history.

Since October 2008, we have seen rates plummet from 5% to January’s 1.5% and there is speculation that the MPC will be cutting the rate further to 1%. A view shared by many as ‘unwise’.

UK Interest Cut

The day started with a slight dip from overnight trading from yesterday’s high of 1.4576 to 1.4400. As the Frankfurt and London sessions opened, a further slide to 1.4365 was experienced with news of further rates cut exacerbating a continuation of previous intraday ride. From the above chart, we are looking to see range trading as many GBP players trade with caution.

A re-test on the 1.4580 could see the market challenge the 1.4980 in the next few sessions of possibly week. While a breakdown below the 1.4320 could also see an avalanche of selling to a possible 1.4050.

However, while the Treasury and the BoE may want to do whatever they deemed necessary to relieve nation of recession pains, but there are concerns about the effect of any further cuts.

At the moment, there are no reasons for savers to keep their money in the bank with the exchange rates at its lowest in years and traveling abroad has now become a luxury.

According to the Federation of Small Businesses (FSB) survey, 63% its members wanted rates to remain at their current level, compared to 24% who wanted further cuts. “These figures suggest that the recent interest rate cuts are not having the desired effect and other means of economic stimulus are required… ” stressed FSB national chairman John Wright.

Finally, from forex trading perspective, any further cut would severely damage already depleted pound sterling, GBP. Keeping interest rates high has been the allure of foreign money into the UK through investments. With heavy borrowing and interest rates gone. Is it surprising that the value of the pounds have shrunk? What is even pothering is why the BoE would want to unsettle things further?

Do you have a view on this matter? Have your say on the comments link below.

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