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Rate Cut Damages Pound

Talk of a rate cut in the Bank of England for this week has weakened the pound.  One reason the economists are stating the pound fell in the economy is the consumer confidence.  The consumers are no longer confident that the market is going to rally.  With talks in the US of a recession and the resounding talk in the UK the consumers are afraid to spend money in the economy.  This affects the worth of the pound and partially the global economy.  So the Bank of England rate cuts are hopefully going to strengthen the consumer confidence.

There are sixteen active currencies in the global market.  This means that of the many countries in the world there are really only sixteen currencies that can affect the global market.  Having said that you will now be able to understand that the pound lowered against thirteen of these currencies.  The pound is no longer as strong as it was at the beginning of the year.  The reason for this is the interest rate and the consumer confidence mentioned above.  Concern over the pound falling has deepened the actual talk of the UK slowdown in economic growth.

Since the pound is weakening against other currencies there are reasons that the Bank of England and the other financial sectors need to be careful in the moves they may.  Talk from Peter Lucas of Ashburton, believes that the pound is going to trade in a range of $1.90 to $2.00 US.  This is down from the trading it did even last month.

With policy makers from the Bank of England the interest rate cannot be lowered by too much in order to preserve the economy.  In other words if the Bank of England made a surprise move and lowered the interest rate by three quarters like the US there would be more panic in the market.  Therefore many of the economists believe the Bank of England will only cut it by a quarter to help strengthen the economy outlook rather than damaging it.  There were sixty one economists surveyed in the last week.  Of those economists surveyed fifty nine believe in a quarter rate cut.  There were only two that expected a half percent in the rate cut.

Another area of concern is the carry trades.  The companies in the carry trades have been defaulting and the US economy is slowing down so that Europe and Asia are both being affected.  The CDX North America Investment Grade Index is just one area of concern.  There are 125 companies in this index in Canada and the US.  These companies actually rose at 3.75 basis points.  The rising points are actually the default risk that needs to be curbed.  It is a high risk place to be in.  With further declines in the pound these high risk companies could affect the global economy and lower the pound even more.  Right now the UK is in a high risk situation with the pound losing in value.


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