ECB Cuts Borrowing Costs At Record Pace as Growth Figures Fail to Impress

The European Central Bank lowered borrowing costs the most in its 10-year history as they cut the benchmark interest rate by 75bp to 2.50% from 3.25% as the third quarter preliminary GDP reading showed that the economy contracted 0.2% for the second consecutive quarter.



Fundamental Headlines
• U.S. Eyes Plan to Lift Home Sales – Wall Street Journal
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• China Urges U.S. to Stabilize Its Economy – Financial Times
• GM, Chrysler May Accept Bankruptcy to Receive Bailout – Bloomberg
• Prudential Plans Sale of Wachovia Unit Stake, Seeks TARP Funds – Bloomberg

·EURUSD – The European Central Bank lowered borrowing costs by the most in its 10-year history as they cut the benchmark interest rate by 75bp to 2.50% from 3.25% as the third quarter preliminary GDP reading showed that the economy contracted 0.2% for the second consecutive quarter. Meanwhile the annual rate of growth was revised lower to 0.6% from 0.7%, and the outlook for growth may weaken further as demands deteriorate. The breakdown of the report showed that household consumption held flat despite a 0.2% decline in the previous quarter, while business investments fell another 0.6%, followed by a 0.9% decline in the second quarter. The considerable downturn has certainly heightened the downside risks for growth, and the dour outlook for the economy may drag on euro as the ECB is widely expected to ease policy further over the coming months. Discuss the topic and your trade ideas in the EUR/USD Forum.

·GBPUSD – The Bank of England lowered the benchmark interest rate by 100bp to 2.00% from 3.00%, which was inline with expectations, as policymakers expect private-sector spending to remain subdued over the coming months. The MPC went on to say that credit conditions remain far from normal despite the extraordinary efforts taken on by the BoE and the U.K. Treasury, and noted that further action will be needed in order to restore confidence in the credit market. Moreover, the central bank highlighted that they see a ‘substantial risk’ for inflation to fall below the BoE’s 2% target, which could lead the MPC to lower borrowing costs further over the coming months as fears of deflation intensify. Meanwhile, home prices in the U.K. fell another 2.6% in November, following a 2.4% decline in the previous month despite expectations for a 1.0% decline. The ongoing weakness in the housing market paired with tightening credit conditions have certainly taken a toll on the economy, and home prices may fall further in the months ahead as Europe’s second largest economy heads into is worst recession since 1991. Discuss the topic and your trade ideas in the GBP/USD Forum.

·USDCHF –The third quarter GDP reading for Switzerland held flat from the second quarter, while the previous reading was revised lower to 0.3% from an initial reading of 0.4%. In addition, the annual rate of growth slipped to 1.6% from 2.6%, confirming that economic activity is slowing at a rapid pace throughout Europe. The dour outlook for Switzerland may lead the Swiss National Bank to ease policy further over the coming months as the central bank expects the economy to contract in 2009, and conditions may only get worse as credit conditions remain far from normal. For more news and resources, visit the new Swiss franc Currency Room.

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