In an attempt to stabilise the markets, the Chinese Central Bank cut interest rates for the fifth time in a year and reduced reserve requirements for the banking system yesterday. Following the cut a degree of optimism ensued, the US Dollar rallied and the Euro fell back against Sterling touching £/€ 1.37 at it’s peak.

The question now is whether this interest rate cut (and any that follow) will be sufficient to deal with the underlying economic problem of Chinese debt. All confidence has evaporated so unless the market regains some poise, a repeat of Monday’s sharp moves cannot be ruled out. Contagion means that this situation is now a worldwide problem, which requires cooperation from the US and the EU in particular. Last night BBC economics editor Robert Peston even suggested that the FOMC and BoE may abandon interest rate rises in favour of cuts and even more QE.

In the background the European Central Bank has continued with it’s own QE programme in a more efficient manner than the FOMC and BoE did by insuring the money reaches the real economy faster. The result should be a quicker impact on the Eurozone economy and there are already positive signs that the European QE injection is working. It is possible now that the European economy could well surprise on the upside in 2016.

If that is the case, forecasts for £/€ to reach 1.45 by the end of the year seem too optimistic for Euro buyers. Any forecasting at the moment is fraught with hazards so anyone looking to buy Euro’s should maybe adopt the ‘if it looks good, do something’ attitude. It’s much better to trade into a market in ones favour, than to chase one that is running away!