Expectations of substantial rate cuts by the Bank of England and the ECB are one of main topics on the agenda at the start of this week. Backed by such expectations, Sterling fell sharply against the Euro and US Dollar, with weaker than expected UK mortgage approvals, continuing falling house prices and manufacturing data signalling that rate cuts could be quite aggressive. Also out this week, will be the PPI reading on Tuesday, retail sales on Wednesday and Q3 GDP reading on Thursday followed by ECB and BoE rate announcements. Last week’s GDP numbers have confirmed the Euro Zone’s largest economy is now in a recession, with lower retail sales and a weaker than expected final PMI reading.

Following last month’s substantial cut, the policy board is expected to cut rates by at least 50bps in order to recharge growth, stabilize the financial markets and prevent a possible deflation scenario. Over the coming months, the global recession is expected to intensify, which will keep interest rates trending lower. This means that speculation for the European monetary authority to lower its benchmark lending rate will hold. Whether the easing will be aggressive or steady will define the Euro’s strength. Looking ahead to the ECB’s decision, a smaller than expected cut (or no cut at all) could leverage the short-term rebound in GBP/EUR and help to turn the market on the belief that European assets will come out of the current global credit crisis and growth slump. On the other hand, a bigger than expected reduction, could be another sign that the Euro Zone is indeed sinking further into a recession.

All things considered, it seems that things are likely to get worse before getting better for the GBP/EUR cross, so getting in touch with your account manager to discuss all possible options and secure a competitive rate of exchange, is most definitely the way forward.