| CATEGORY: NEWS AND ANNOUNCEMENTS |
Technical Analysis: Rate cut reaction |
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By Michael Hewson
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Thu 04 Dec 2008
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LONDON (SHARECAST) - The Bank of England today cut rates by 1% which was quickly followed by a 0.75% cut by the ECB thus increasing the gap between European and UK interest rates in Europe's favour.
This is the lowest level UK rates have been since 1951 and highlights what a bind the UK economy is in. Expect there to be more cuts going into 2009 as Europe/UK rate differentials continue to widen.
The focus will now be on sterling and the equity markets and the hope will be that this will somehow buoy confidence and provoke a rally in confidence and the FTSE. This is unlikely to happen; the Bank in some respects was caught between the devil and the deep blue sea. If it had cut by more than 1% there was a fear that it would have provoked a run on sterling.
As I indicated, after last months decision on rates the future direction for the FTSE and sterling in the long term will not be affected by rate cuts or otherwise. Given current conditions these are pretty much set – sterling will still remain under pressure and a monthly close below 1.4065 would potentially be very damaging for the long term prospects for the GBP/USD rate. Since 1985 sterling has never closed below 1.4065 against the U.S dollar on a monthly basis. As for the EUR/GBP rate the widening differential will also increase the likelihood of further sterling weakness and a test of 1.10 against the euro, on the way to parity.
A break of 1.4065 would set-up a test of the 2001 lows at 1.3685, a break of which would, in turn, set-up a test of 1.3000. That would open up a move towards parity with the dollar and levels last seen in March 1985 when sterling made its all time low against the dollar of 1.0360, great news for US visitors, but not so good if you’re going the other way.
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