The Bank of England have now followed suit in the rest of the major economies by cutting interest rates outside of normal meetings. A 50bps rate cut from 0.75% to 0.25% in the early hours of this morning causing sterling to weaken across the board with the GBP/USD pair dropping form around 1.2935 to a low of 1.2830 before bouncing. GBP/AUD breaking 1.9780, before bouncing, GBP/CAD bouncing off 1.7650. We may see real money investors who previously holding pounds to benefit from UK interest rates yields now re-position themselves, Sterling could continue to weaken should this occur. Whether this transpires will remain to be seen.
This emergency cut comes ahead of the budget announcement today where Chancellor Rishi Sunak has committed to £600bn of infrastructure spending over a decade. Comments from Sunak yesterday evening stated that this budget was ‘for people right across the country- no region will be left behind’. This will be a major positive for the UK economy which could see GBP/USD bounce. It’s a pivotal day for sterling with an emergency rate cut, budget, continual uncertainty in UK-EU trade negotiation, covt-19 and an oil crisis.
Monday’s stock market crash has led to Trump labelling the Federal reserve as ‘pathetic’ on twitter for not cutting rates further. He also added on to his market moving platform that ‘The Federal Reserve must be a leader, not a very late follower, which it has been’. Investors are pricing in a deep 75 bps cut as a result. The central bank has already delivered their first intermeeting rate cut since the collapse of Lehman Brothers, another rate cut imminent outlines the severity of the situation and one questions the effectiveness of monetary stimulus in this unprecedented environment. Trump has promised fiscal stimulus and said he would discuss with the Republican lawmakers ‘a very substantial ‘payroll tax cut. Though investors across Wall Street where left bewildered and underwhelmed as no tangible detail came out of the white house. This lack of action has only added to the growing fears of the impact coronavirus will have to on the economy resulting in a hesitant recovery in the stock market petering out yesterday. Investors have moved into US bonds that has led to a renewed sell-off in the treasury yields causing dollar to slide across the board.
The backlash from Italy’s decision to put the entire country on lockdown can be seen in the European shares. Germany’s DAX lost 1.4%, France’s CAC 20 dipped 1.5% and the FTSE 100 ended flat. Italy’s main index dropped another 3.3% after falling 11% on Monday. This coupled with a likely German recession around the corner is leading investors to believe that the ECB will likely take measures to stimulate the economy come on Thursday. Only modest gains against the Dollar as a result with EUR/USD bouncing above 1.1350
At the time of writing:
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