FOMC cut boosts equity markets and puts dollar under pressure

Following the decision by the FOMC to cut rates by 50 basis points to 1.00%, Marc Cogliatti, Currency Strategist at HiFX comments: "The decision to cut has helped equity markets continue their rally seen over the past couple of sessions signalling some risk appetite retuning to the market. Whether this is the start of a broader recovery or just a correction from the recent sharp decline remains to be seen, however the impact has already been felt in the currency markets with the Dollar giving back some of the recent ground made against both Sterling and the Euro.

"In recent weeks, there has been a close correlation between equity markets and GBP/USD. When equities have been under pressure, Sterling has suffered at the hands of a surging Dollar that has been buoyed by risk aversion and a flight back into cash. However, when equities rally and a risk appetite returns to the marketplace, the Dollar comes under pressure again as we have seen this week."

To put the move into context:

01/10/08: Dow Jones 10,831 GBP/USD 1.7710
24/10/08: Dow Jones 8,379 GBP/USD 1.5923
29/10/08: Dow Jones 8,991 GBP/USD 1.6417

Towner concludes, "In the weeks ahead, we anticipate further turbulence in the markets and expect Sterling to remain under pressure against the Dollar. The Bank of England are expected to follow suit and cut the UK base rate at next week's policy meeting and whist this may give a further boost to equity markets, it's unlikely to have the same impact on Sterling."