• King For A Day
• Sterling Enjoys Its Lunch
• Further QE More Likely?

A three-day rally on world equity markets stalled today and the euro dipped as investors waited to ascertain the next moves by the world's major central banks to get to grips with declining global economic growth and Europe's fiscal crisis.

Forex traders saw riskier assets showing an upturn last Friday on the back of the U.S. jobs data, which supported hopes of a further policy easing by Bernanke & Co at the Fed. In addition, markets enjoyed a fillip after ECB President Draghi’s words about easing Spain and Italy’s soaring borrowing costs.

Today’s big Central Bank event seems to have exerted a similar mini-boost, most notably in favour of sterling. Prior to Sir Mervyn King’s press conference to accompany the publication of the Bank of England’s inflation report, the GBP rose as far as $1.5605 from around $1.5575. After Sir Mervyn started speaking, however – delivering his owlish, downbeat predictions on the UK economy – the currency then gave up most of those gains to trade at $1.5588, down 0.2 percent on the day.

But now we’ve had lunch, and the market boffins have had a chance to digest the BoE’s small print along with their cheese and pickle rolls, we’ve seen a rapid surge in cable, peaking at an intraday maximum of 1.5673 during European trading. Since then, the pair has consolidated its gains and retreated slightly, where it presently resides at 1.5662, marking a decent advance of +0.25 percent above its opening. Indeed, sterling has rallied pretty much across the board on the news that Sir Mervyn and MPC colleagues cut their forecasts for medium-term growth, and for inflation by less than some traders had expected. As Lee McDarby, Investec Corporate Treasury, said: “The immediate signs for sterling are re-assuring though as it has bounced this morning, largely due to a balanced outlook from Mervyn King and the lack of any clear commitment to further QE at this stage.”

During the media briefing, Guvnor King reiterated how the Bank had sharply cut its forecast for medium-term growth in the UK's economy because of worries that factors hurting growth since the financial crisis may be longer-lasting than first thought. Many observers are now openly muttering their belief that such a dire outlook is likely to signal increased likelihood of further policy easing by the BoE before year-end. One immediate reaction came via Twitter: former MPC member ‘Danny’ Blanchflower - still enjoying throwing punches at his former employers - tweeted <the> “mpc downgraded their growth forecast again but it was obvious when they made them they were far too optimistic so not good enough”!

A more measured response from Currencies Direct senior analyst, Phil McHugh (pictured) told this site that “the revisions lower in growth and inflation almost guarantees that more QE will follow in the autumn. However,” continued McHugh, “the GPB has rallied following the report on the back of comments from Mervyn King playing down calls for a rate cut in the UK.  The pound has jumped around 0.5 per cent against the euro and the USD following the report.”

Nonetheless, Sir Mervyn still gave investors plenty of reasons to panic. Meanwhile, the euro continues its slide as New York traders get out of the blocks. Having extended losses against the greenback toward a fresh weekly low, the single currency has come under renewed pressure amid worries about the euro zone's economic and debt problems. After failing to break strong resistance at 1.2442 this week, euro/dollar recently printed a low of 1.2325, and it is presently just about managing to trade above that level.

 Drew Hillier. Editor, ForexSpace.com