Pound Pummeled

As any Forex trader knows, the British Pound has taken a pounding on world currency markets. The bad news just keeps on coming with no end in sight. On Monday the Pound took another drubbing as the news came out that Moody’s Investor Service had downgraded the credit rating of the venerable Barclay’s Bank in the UK.

Troubled UK Banking Sector

Forex traders and investors quickly shed the Pound as UK banking fears wiped out last week’s gains. Last week the Pound posted its biggest percentage gains against the US dollar in 20 years. Dustin Reid of RBS Global Banking and Markets said that concerns about the UK banking industry may prompt the “Bank of England to cut interest rates by more than expected.”

BOE to Cut Rates

Most Forex traders expect the bank to cut rates to a historic low of 1.0% on Thursday down from 1.5%. The Pound fell to $1.4203% after reaching a low of $1.4053, below last weeks high of $1.4527. The Euro rose 2.6% against the Pound trading at 90.34 pence. This reversed last weeks trend where the Pound had its second best week in 10 years while the Euro suffered record losses.

The Pound’s decline started on Monday after Moody’s cut Barclay’s credit rating causing shares of Barclays to fall 11%. The news caused Forex traders to dump the Pound in favor of higher performing currencies. David Powell, Bank of America currency strategist had this to say, “The outlook for sterling remains one of weakness. The data was not any worse than expected but the overall tone was still negative for the currency.”

UK Rates Lower Than Euro Zone

At present UK rates are 50 basis points lower than in the Euro Zone and the expected rate drop could push the Pound even lower due to a growing rate differential. Forex traders will be watching the moves made by the ECB and the BOE closely and will also be watching the US employment report. Forex trading has become somewhat of a fine art lately and Forex traders must absorb massive amounts of global data. Once again its going to be a very busy week!

Greece’s Debt Rating Downgraded

Things just seem to be getting worse every day for the beleaguered Euro. Recent data from the Euro Zone has been dismal at best. In the latest round of bad news for the Euro Standard and Poor’s downgraded Greece’s sovereign debt rating putting even more pressure on the Euro.

ECB Cuts Rates

The long awaited rate cut by the European Central Bank was realized today (Jan. 15^th, 2009). The central bank cut rates by 50 bps to 2.0%. Many Forex traders expect the ECB to cut rates even further in the near future. In mid-morning trading in New York, the euro fell to a five-week low of $1.3048. News of a request by the Bank of America for more government aid added to concerns about mounting credit losses in the financial sector. This, in turn, depressed risk appetite sending forex traders and investors to the dollar seeking a safe haven.

ECB ‘Behind Curve’ Addressing Problems

Jessica Hoversen, a fixed income and currency analyst at MF Global Ltd. in Chicago stated, “As problems in the U.S. financial markets elevate we are seeing again risk aversion-mode in currency trading. And in that mode, the dollar benefits. On top of that, there’s no doubt the ECB is behind the curve, which does not help the euro.” During the global financial risk aversion has helped the US dollar to retain its strength.

ECB’s Rates Lowest Ever

The ECB, which has been seen by many Forex traders as slow to lower borrowing costs, reduced interest rates to 2.0 %from 2.5 %, its lowest rate ever. ECB president Jean-Claude Trichet has sent mixed signals about the timing of the next rate cut. Many Forex traders see Trichet’s talk of both inflation and growth risks and see concerns about inflation as misplaced. Economic data from the Euro Zone is deteriorating and many Euro Zone countries have seen their credit ratings cut or are at risk of future cuts.

Many Forex traders have seen the ECB’s stance as inflexible and consider the Euro Zone behind the curve in addressing economic problems. This week has been a wild ride for Forex traders and investors.