The bank of England finally dropped its non interventionist approach to the credit crunch by an infusion of 4.4 billion sterling pounds into cash strapped markets. This could have a dramatic effect on the Pound/Dollar exchange rate says Michael Wright of Betonmarkets.com
The decision, which aims to encourage banks to lend more freely to each other, came as the European Central Bank also indicated it was ready to lead a fresh round of liquidity-boosting operations later this week - a move that analysts said could be of far greater consequence than the Bank of Englands limited action. Over the last two weeks the European Central Bank has infused over 130 billion dollars in the system, the US federal bank added another 62 billions. Japan and Australia also contributed with another 10 billion dollars.
Over the last few weeks central banks across the world infused the cash market with extra reserves, trying to ease the sudden lack of credit available in the system. With more and more defaults on loans happening across the world, and more specifically the US, lenders are being a lot more careful as to whom they lend to.
The Banks decision helped lower the overnight sterling borrowing rate on Wednesday to 5.91 per cent, from 6.11 per cent on Tuesday. However, the three-month money rate rose to 6.8 per cent - a nine-year high - as banks hoarded cash because of fears about liquidity calls in the next few days.
The lack of available GBP, also boosted the Cable (GBP/ USD exchange rate) to a recent high of 2.02. Also contributing to the raise in the exchange rate is the news which shows a possible slowdown in the US market, which could result in a possible rate cut by the FOMC.
Such a move will could help boost the GBP/USD back to the yearly high of 2.06 which was hit earlier in the year, and depending on the wording by the FOMC after the possible cut, might push the pair even higher. Some analysts believe that the two countries are heading into opposite directions which might cause a much bigger interest differential, and may even lead to a positive carry trade possibility.
With BetonMarket.com you can take advantage of this possible situation by buying a no touch trade, which compensates traders for predicating which level the pair will not touch during the duration of the bet. A no touch on the GBP/USD to the lower with a 25 day term and a 1.95 level offers a 12% ROI. This means youre expecting the pound to rise, stay still or only drop slightly against the dollar over the next month.