ProgressiveFX.co.uk

Market focus this week has been squarely on the European Central Bank and the Bank of England MPC meetings, both of whom had their monetary policy meeting this week, and the U.S presidential Elections. The U.S made history on Wednesday as Barack Obama becoming the new President elect. Equity markets reacted favourably to the election results which placed the dollar under pressure early in the week. The BoE shocked markets by cutting interest rates by 150 basis points, bring the central bank?s lending rate to 3%. Market speculation had been for between 50 and 100 basis point cut but the unprecedented move caught most traders completely off guard. Reaction to the rate cut was very mixed as the size of the cut sparked fears anew that the extent of the credit turmoil and recession is possibly  far worse than analyst may have initially thought. Global equity markets suffered heavy losses as investors once more fled risky positions to favour the dollar. The BoE statement to support the interest rate decision on Thursday indicated the MPC felt that the UK economy would suffer a severe contraction in the short term, the housing market would continue to deteriorate and consumer budgets are likely to be squeezed even further.

The ECB also delivered a rate cut this week, cutting by 50 basis points, in line with market forecasts. The announcement came shortly after the BoE decision and disappointed many traders who had begun to price in the possibility of a larger cut. ECB President Trichet was able to calm markets during the follow up press conference. He left the door open for future rate cuts and made it clear that the ECB will take appropriate action to ensure economic stability is achieved and maintained.

The dollar made some late week gains on the back of Thursday?s equity market slump but volatility for the US dollar was not only driven by stock markets but also by weaker economic data that quickly saw the buck give up most of its gains. Employment data this week came out much worse than market expectation. U.S ADP data showed employers shedding 157,000 jobs in October. The ADP report was followed at the end of the week by the U.S Non Farm Payrolls, the report painted an even bleaker picture of the US economy showing 240,000 job were lost in October, market participants had expected a loss of only 200,000. The unemployment rate in the U.S increased to 6.5% from the previous months 6.1%. The data called into question whether the U.S economy was actually recovering as well as was first thought.

After a week where inflation, recession and interest rate outlooks have dominated the markets, traders will keep a close eye on the weeks inflation data. The BoE rate cut has confirmed a complete shift in focus for the MPC who have in the past been primarily focused on price stability. Analysts will want to see whether inflation data will support the central banks statements that lower energy and food prices will eventually bring inflation to within the bank?s inflation target range.