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What To Expect From The BoE And ECB Tomorrow

Written by A Forex View From Afar on Wednesday, February 04, 2009

Tomorrow, the ECB and the BoE are expected to announce their monetary stance for the period ahead. The BoE is expected to reduce rates down to 1%, the lowest rate ever seen in the bank’s 3 century history, while the ECB is expected to hold rates at the current 2%.

However, most analysts agree that the ECB will resume cutting rates in March, at the next interest rate meeting. There is a lot of weight put on this particular meeting, because the ECB will update its staff projections. The euro area economy is forecasted to contract by up to 2.5% in 2009 by some analysts.

At the same time, the U.K. economy is projected to shrink by 2.7% in 2009, while the downturn will continue until the fourth quarter, the Niesr research institute said today. Despite this, the sentiment regarding the future path of U.K. monetary policy is starting to change little by little. According to the minutes of the latest BoE meeting, the Governing Council will not reduce the overnight interest rate any lower, if there is not an observable deterioration of the U.K. fundamentals. As such, the BoE says it acted preemptively until now.

It is very likely that the ECB will continue cutting below the present 2% rate, while the BoE will appear more reluctant to reduce the interest rate any lower. This should influence the Eur/Gbp parity in the medium to long term, dragging the pair lower, as the rate differential shrinks. However, a lot of emphasis will be put on Mr. Trichet’s press conference, which will probably spark a lot of intra-day volatility

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