Quantitative Easing & Currency Exchange Rates

Pound climbs, but doesn’t last
Yesterday the pound climbed against the dollar, but fell against the Euro. This morning, the pound has retracted it’s gains and is falling again. All this on the backdrop of the headline news that the FTSE broke through 5000 for the first time in nearly a year.

However, the currency markets took a different view to the headlines proclaiming that we are now in recovery. Now, if that was the case, surely the pound would be getting stronger, not weaker?!

Today we’ll look at whether the BoE will announce further Quantitative Easing, how this may affect exchange rates, and whether the economy is indeed recovering. Pound Exchange Rates as at 08:30am 10th September are as follows:

  • GBP/EUR 1.1331
  • GBP/USD 1.6510
  • GBP/AUD 1.9241
  • GBP/NZD 2.3745
  • GBP/CAD 1.7833
  • GBP/CHF 1.7172
  • GBP/ZAR 12.457
  • GBP/JPY 152.13

Bank of England Interest Rates and Quantitative Easing
The Bank of England will announce their decision on interest rates and Quantitative Easing at lunchtime today. We expect them to hold interest rates at 0.5% for the sixth month in a row, when it announces its decision later.

It is also likely to maintain its programme of pumping money into the economy – called quantitative easing – but is not tipped to extend it. However, there is an outside chance that the amount of money being created and pumped into the economy will be raised.

Last month, they announced a further £25 billion, and it later transpired that 3 members wanted an extra £50bn. So, markets are in limbo awaiting this news. Recent data has suggested that the UK has begun to climb out of recession, but the Bank has warned recovery is not assured and that it will take months for its policies to have full impact.

3 of the 9 member committee, including the Bank’s governor Mervyn King, voted last month for an increase, to £200bn.The aim of quantitative easing is to encourage individual banks to expand their balance sheets – moving their reserves into something that offers a higher return, such as making new loans – and so increasing the supply of money in the economy.

A recent member of the MPC recently turned on the bank, criticising it for not spotting the recession and then not acting decisively enough to avoid it. Read more here.

If we do see further Quantitative Easing, then expect the pound to be hit hard and for exchange rates to fall. For those that need to buy currency with Sterling, consider locking in rates prior to the announcement to protect yourself against adverse movements. Those selling foreign currency back to Sterilng may wish to wait and see what the Bank says.

Bear in mind however that no-one can accurately predict which way rates will go, so ultimately it has to be your decision when to fix your rate.

Recessions Compared

Here we can see how recent recessions compare. You can see the depression on the 30’s has been the worse, but the charts also clearly show the W shaped recession, where you get recovery, only for things to get worse again before recovery proper.

The danger as you can see from the black line showing the current downturn, is that we could be in for a W shaped recession.

You can see the signs of recovery, but no-one knows if this will continue to move this way. We have had some more positive figures recently for the UK, but fundamentally the problems remain – lack of lending, high unemployment, low interest rates, and the governments insane policy of throwing billions of pounds at the problem in the hope it will go away.

Finally, some regular readers could not view our recent appearance on CNBC. If you couldn’t view it, then watch it here on You Tube now. We have a regular 3 weekly session on CNBC, so I will post the video every fortnight as it gives an interesting insight into the currency markets.

Todays Data
EU – ECB Monthly Report
UK – Halifax House Prices
UK – BoE Interest Rate Decision & QE
US – Jobless Claims
US – Trade Balance
Can – Interest Rate Decision
Ger – Wholesale Price Index
NZ – Food Price Index
Jap – Gross Domestic Product

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