In response to weak employment news (for example, claims for jobless benefits increases their most in 16 years in July) and a downgrade by the Bank of England in its assessment of England's economic outlook, expectations for interest rate cuts from the Bank of England ramped up today.
The 90-day sterling futures contract, which is used as a proxy for the Bank of England's benchmark rate, has moved sharply, with the December contract down 19 basis points on the day, and the March 2009 contract down 27 basis points. The market is now priced for close to roughly 100% odds of a single 25 basis point cut occurring this year in the Bank of England's benchmark rate, which has been lowered three times since peaking at 5.75% last July. The BOE last cut rates in April and the rate now sits at 5.00%. A 25 basis point cut, which is now priced in for November, would bring the BOE's benchmark rate to its lowest since November 2006.
Looking further out, the market is priced for the BOE to cut rates to as low as 4.25% by the middle of 2009 and to leave rates there for the balance of the year. That would put the benchmark rate at its lowest since June 2004.
Expectations for decreases in short-term interest rates are playing an important role in the rebound in the value of the dollar and this looks likely to play a positive influence in the months to come. Interest rate parity is of course not the only influence on foreign exchange rates, but as I made clear in my note last week(Nine Reasons the Dollar is Rallying),there are many other factors boosting the value of the dollar and which could keep it going for a while.
More: Click for Latest Economic coverage ...