Retracing over 60% of the rally seen in USD/GBP from 2001 to 2007, Sterling was dragged down by comments from the BoE's King that the UK economy was probably entering its first recession in 16 years.
It steadied overnight but with key support at $1.65 and then $1.63 giving way, further new lows are now seen as inevitable as the market bets that the BoE will take aggressive action on interest rates in order to shore up the economy and prevent inflation from undershooting its 2% target over the medium term. As the focus switches from inflation to growth, the tone of the minutes of the last BoE meeting, which were released yesterday, indicates that further easing is on its way with the next move seen in November. Markets will be keeping a close eye on this morning's release of the UK retail sales data for September, with consumer spending forecast to slow.
Like the dollar, the Yen continues to benefit from the turmoil in credit markets as it hit a seven month high versus the Dollar overnight, trading beyond Y98. Sterling/Yen meanwhile is back at levels not seen since 2001, with the Euro/Yen striking a 6 year trough.
After leaving monetary policy on hold on Monday, Hungary's central bank raised interest rates by 3% to 11.50% yesterday in a bid to try and support the forint, which fell close to historically low levels versus the Euro yesterday. However, while there was an immediate bounce in the HUF, gains were quickly reversed and it remains under downward pressure. Rates in New Zealand were cut by 1% to 6.50% overnight, in line with expectations. Further easing is anticipated.