International Financial Markets

Global trends remain very poor, in financial markets and in economies. There are signs that the downturn is intensifying, with the emerging markets being more badly hit now – via trade linkages – than at any time since the crisis began.

Summary of main changes to exchange & interest rate forecasts

 

Global trends remain very poor, in financial markets and in economies. There are signs that the downturn is intensifying, with the emerging markets being more badly hit now – via trade linkages – than at any time since the crisis began. The collapse in global trade volumes, likely to be negative for the first time since 1982, is resulting in sharp falls in industrial output around the world. Although financial markets have shown some signs of stabilisation, they remain fragile. More needs to be done to unblock credit markets – the new US administration may announce measures in early February to attempt to do this and pass a fiscal recovery plan.

 

The latest US government stimulus plan, worth close to $800bn, is currently being debated in the Senate and a decision is imminent. US Treasury Secretary Geithner is also set to announce significant new initiatives to help bolster the fragile financial sector. The pressure on policy makers has intensified in recent weeks after confirmation of a sharp contraction in output in the final quarter of 2008 and acceleration in job losses.

 

Although the latest measures will not prevent a sharp US recession this year, they should provide the foundation for recovery in 2010, potentially sooner than most other developed economies. The view underpins our forecast for the dollar to appreciate further against its main trading counterparts over the next 12-18 months. We look for €/$ at 1.25 at end-June and 1.23 at end-2009. £/$ is forecast at 1.37 at end-June, then remaining close to this level until Q1 2010.

 

The Bank of England cut interest rates to a historic low of 1% in February, citing a substantial risk of undershooting the 2% inflation target in the medium term. On current trends a further reduction in Bank rate in coming months seems likely, potentially to a floor of 0.5%. We expect to hear more about this and what other more unorthodox tools might be considered to revive the economy in the February Inflation Report. In the euro zone, we expect the ECB to cut interest rates by 0.5% to 1.5% in March, then to a floor of 1.25% by end Q2 2009.
 

 

Full Report

www.forexhound.com/Uploads/IFOFebruary.pdf