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Thursday November 6, 2008 - 15:33:24 GMT
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Central Banks in Europe Exciting This Market

Key News
• Bank of England Cuts Interest Rate by 1.5 Points to Lowest Level Since '55 (Bloomberg)
• The European Central Bank cut its main lending rate by 50 basis points. (Bloomberg)

“Doubt is not a pleasant condition but certainty is an absurd one.”


FX Trading – Central Banks in Europe Exciting This Market

Today is interest rate day! That is, the Bank of England and the European Central Bank culminate their most recent monetary policy discussions and announce changes to their benchmark interest rates.

The BOE actually just decided to cut rates a full percentage point, i.e. 150 basis points. This was a surprise. The ECB cut 50 basis points and did not surprise. But this still goes very much to the point that things are getting awfully rotten in the UK and European economies.

I started writing today’s Currency Currents before either bank had made their announcement, and here’s what I had jotted down ...

Consensus expects a cut of 50 basis points from each of them. I wouldn’t be too surprised if they cut by a larger margin. But as quickly as things have turned sour in these economies, they probably still want to avoid forcing rates down too quickly. Besides, they’ll probably be at this a while longer. They’ve got plenty of time to chisel away a considerable chunk or their interest rates.

Ultimately, a cut of 50 basis points ... 25 basis points ... or 75 basis points ... and what we expect will be an ongoing easing campaign will put a hurting on the currency of the respective banks. Only that hurting may not be felt right away. But it could ...

Ha ... sure could alright! But I didn’t expect it!

Turns out, there was some immediate hurt being felt. Actually, when it comes to those trading the British pound, there was probably a lot of immediate pain being felt within the first 30 minutes after the rate cut.

Within the first 11 minutes following the announcement by the BOE, the British pound had plunged roughly 140 PIPs. That’s a huge move. But within minutes the drop was retraced, and in the 10 or so minutes that followed the British pound surged by roughly 150 PIPs.

Talk about a washout. That’s a brutal 30-minute, 300+ PIP range.

This is far more up-to-the-second reaction than we’ve been seeing in the wake of recent rate decisions from global central banks. But this time is different perhaps because there’s been a lot of sideways, wishy-washy trading over recent days ... at least for the currencies ...

Let’s Go to the Charts for Some Clarity

Despite the big moves this morning, little has been resolved in the way of a continued correction versus a resumption of the primary trend. So we turn to the charts ...

Looking at recent daily action, a chart of the euro and British pound show similar patterns. That narrowing wedge pattern seen in the following chart of the euro is what’s often referred to as a bearish pennant. And what this particular pattern signifies is pent-up momentum.

 (Chart unavailable in text format.)

The euro isn’t fairing well after this morning’s bank decisions. What we’d expect is for prices to exit this wedge and move powerfully in the same direction as price action leading into the wedge, which would be down.

Should we see a sharp breakdown through the lower bound of this pennant formation it could mean two things:

First, a test of the lows from October 28 would be in the cards.

And second, depending on how the euro handles these lows, we could determine whether the next powerful drop might follow.

Of course, at that point we would assume the US dollar will have compensated for its corrective move and is following through on the rally it started back in July. We will be watching ...


John Ross Crooks, III
Black Swan Capital LLC


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