MARKET REPORT WEDNESDAY 19^TH MARCH

Good morning,

In the build up to the FOMC rate decision last night, the Dollar extended its losses against the Euro and also slumped to 2.0200 versus the Pound amid speculation that policy makers would slash interest rates by a whole percentage point in an attempt to restore some confidence to the market. The demise of the U.S securities firm Bear Stearns sent shockwaves through the market earlier this week and that news coincided with the Fed's decision to lower the discount lending rate to just 3.5%.
This was just the latest attempt for the Fed to restore some sense of stability and last night the FOMC actually cut interest rates by 75 basis points, which means the Dollar is now the second lowest yielding currency in the developed world. Nevertheless, the outcome of the meeting and the Fed's decision to resist cutting rates by a whole percentage point prompted a 400 point rally in equities while the Dollar made gains against both the Pound trading at 1.99 levels and the Euro.
The tone and language used in the accompanying statement suggests that policy makers are still downbeat on the prospects for the economy but the rising inflationary pressures are a major concern.

The Euro has risen to within a whisker of the 1.6000 level against the Dollar this week but the single currency was sold off in the aftermath of the FOMC rate decision as the Reserve Bank cut rates by less than anticipated. The overall sentiment surrounding the European economy combined with the staunchly hawkish stance of the ECB suggests that this move reflects traders adjusting positions rather than a shift in sentiment.

The Pound made strong gains against the Dollar yesterday while the UK currency also stemmed any further losses versus the Euro as a report from the Office of National Statistics showed that the UK inflation had accelerated at the fastest pace in nine months. Consumer prices climbed 2.5% in February, compared with 2.2% the previous month as a significant increase in gas and electricity prices limit the Bank of England's scope to cut interest rates. The annual pace of inflation has now exceeded the Bank's target for five months in a row and the governor of the BoE, Mervyn King, believes that consumer prices will continue to accelerate over the coming months.
The MPC now face a dilemma in balancing the risks of higher inflation against a slowing economy and speculation of further monetary easing has sent the Pound crashing to a record low versus the Euro.

Michael Ince

Michael Ince
Senior Trader
First Rate FX

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