Yields on British 10-year benchmark government bonds hit a six-month low on Tuesday as investors continued to seek safe-haven assets following the demise of U.S. investment bank Lehman Brothers. Investors have now focused their concern on U.S. insurer American International Group after ratings agencies downgraded its debt and there has also been some speculation the U.S. Federal Reserve could cut interest rates at 1815 GMT.

“The market is very much hunkered down for the Fed decision later today,” said Richard McGuire, a strategist at RBC. “We think there is a chance of a cut — it’s just a question of should they, would they? We can see good reason for them going, it’s after all a necessary process of unwinding. However, the impact on the market is obviously significant and they may feel they need to shore up confidence.” Concerns about the world’s financial system overshadowed the release of British inflation data due at 0830 GMT, which is expected to show consumer price inflation picking up to 4.6 percent in August from 4.4 percent in July. That will trigger another explanatory letter from the Bank of England to the government, outlining how policymakers intend to tackle rising the sustained spike in prices. With worries about the global economy growing, the BoE may argue that slowing demand will bring inflation down next year. “With recession looking certain, inflation should fall sharply through 2009 and we continue to see room for 150 basis points of rate cuts within the next 12 months,” said James Knightley, an economist at ING. “So even though interest rate contracts have moved to price in policy easing, we still see value.” The Bank of England has held rates at 5 percent since April. Money markets are now pricing in a quarter-point rate cut by November and four rate cuts by August 2009.

source: fxstreet.com