The Bank of England cut rates by 150 bps surprising markets that were expecting a 50 bps reduction. The pound would fall on the news but quickly retraced as forex traders viewed this as a positive for the U.K. economy. The SNB also announced a 50 bps point cut in its Libor target range which surprised markets as there wasn’t a scheduled policy meeting, the USDCHF jumped nearly 100 pips on the news. The ECB is next to follow which is turning out to be a coordinated reduction by the European central banks. The SNB said in a statement that the global economic outlook has deteriorated more severely than anticipated, which will have an impact on the Swiss economy.

The BoE’s recent concerns of inflation have reversed to deflation as the central bank stated that the aggressive cut was needed to ensure that inflation remained at the 2% target. The move could signal that the U.K. economy may be headed into a deep recession and that further easing will follow with the possibility that that the BoE will need to follow the Fed and bring rates as low as 1.00%. The NIESR GDP estimate came in at -0.5% which signals that the U.K. economy is already in a recession and further easing is expected from the central bank. The U.K. housing market continued to slump as home prices according to HBOS fell 2.2% in October and 13.7% on an annualized basis- which is the lowest level on record. The credit crunch delivered a major blow to an already slumping market which will be a determining factor in future policy decisions.

The ECB cut rates by 50 bps as expected sending the Euro to 1.2750 after it reached as high as 1.3100 yesterday. A dismal German factory order report has added weight to the EURUSD as demand fell 8.0% in September, which was the largest drop on record. Declining demand for machinery led the drop which doesn’t bode well for future business as companies are cutting back on capital expenditures. The results are troubling because the impact of the frozen credit market in October are yet to be realized and may lead to a steep drop in new orders which only strengthens the argument that a prolonged recession is underway. Therefore, all eyes will be on President Trichet’s remarks today as many expect the central bank leader to signal further easing from the MPC, which could sink the Euro further.

The weekly jobless claims report is the only significant event risk on the U.S. calendar with another week above 450,000 expected. The report will add to the already dour outlook for the U.S. labor market as ADP reported yesterday that private payrolls were reduced by 157,000 in October. This doesn’t bode well for the upcoming NFP report which may have forex traders start to price in another month of job losses which could weigh on the dollar. However, the story of the day will be the rate cuts by the BoE and ECB which could lend dollar support over the near-term as the interest rate differential is expected to continue to decline as European policy leaders are expected to continue easing further. However, there has been a train of thought that the rate cuts could improve the outlook for the global economy and lead to a rebound in risk appetite. Global equity markets have traded lower all day and with Dow futures pointing to a lower open risk aversion remains strong which may continue being a supportive factor for the dollar due to its safe haven status.

Antonio Sousa is a Currency Analyst for FXCM.