Exchange rates after BoE decision.

Good Morning. The pound remained fairly steady yesterday after the news from the UK and EU central banks that interest rates will be left on hold at 0.5% and 1.0% respectively. At 08:30am rates stand as follows:

  • GBP/EUR 1.0860
  • GBP/USD 1.5999
  • GBP/AUD 1.7686
  • GBP/NZD 2.1638
  • GBP/CAD 1.6834
  • GBP/CHF 1.6490
  • GBP/JPY 142.91
  • GBP/ZAR 11.775

Bank of England & Quantitative Easing
It was expected that rates would be left on hold, and the main news again was Quantitative Easing. A phrase that this time last year meant nothing to most people, but that has now become one that we have been using lots over this year!

BoE rate setters held back from providing further aid for the British economy yesterday despite concerns over the fragility of the UK’s pull out of recession. The Bank of England voted to hold interest rates at their 0.5 per cent record low and continue with its £175 billion programme to boost the money supply at its latest two-day meeting. You can read their press release here.

The Monetary Policy Committee (MPC) faced calls this week to increase the scale of its quantitative easing efforts to at least £200 billion after worse than expected manufacturing figures. But yesterdays decision was in line with the views of most economists, who expect the MPC to look again at the impact of the policy next month with the help of the Bank’s latest inflation forecasts.

The MPC is weighing up mixed signals on the economy, with rising house prices and stock markets set against a surprise 1.9 per cent fall in manufacturing output during August after two months of growth. It added that it would take about one more month to buy the full planned amount and warned it would keep the scale of the programme under review, keeping the door open for further quantitative easing measures in the future.

Analysts said that while sterling had been supported by rates staying low, the view that weakness in the economy might require more stimulus from the BoE had hindered further gains. I expected rates to climb after the announcment, however it is the view that more stimulus will still be needed that is keeping pound rates low.

Although the wider economy is expected to return to growth towards the end of this year after five quarters of recession, the Bank’s preferred measure of money supply showed sluggish growth during August – casting doubt on whether the QE policy was working.

Which way will the pound go in the next month?
The pound has taken a beating in recent weeks as markets have read comments by BoE Governor Mervyn King that a weak currency may benefit the UK economy as a cue to dump sterling. This is what has brought rates down from €1.16 several weeks ago, to the level today just below €1.09. However, I was surprised that the BoE did not mention currencies at all in their statement yesterday.

With few fireworks resulting from Thursday’s meeting, focus turns to the BoE’s November gathering, at which the bank will have new economic forecasts on which to base its policy outlook. Analysts are divided on whether another increase in the asset purchase programme will be announced next month, but many say more signs of economic weakness will increase the chances of more quantitative easing.

We’ll have to see how economic figures look for the remainder of the month. Negative figures will keep the pound weak, and increase the chance of more QE next month. Positive figures will strengthen the pound, and cause rates to climb back to the €1.15 level. The markets do expect more QE next month, and so this is probably already priced into the market for the most part.

It’s the fact the the data we’re getting is mixed that is making movements impossible to forecast. Good house price and Retail information on the one hand, but poor manufacturing and industrial production on the other.

Rates will likely stay steady for the coming weeks, with negative data keeping rates where they are and positive news causing a rise. I think at the bottom end, the lowest we’ll see is maybe a point or two below where we are today. There is more risk to the upside however, with any good figures risking causing rates to recover back to €1.14 / €1.15.

Todays data
We have Trade Balance data for Germany, the US and the UK. This is a balance between exports and imports of total goods and services. A positive value shows trade surplus, while a negative value shows trade deficit. It is an event that generates some volatility for the currency markets.

We also have Producer Price Index for the UK, and for the EU we have a speech by the ECB chairmain Trichet. In the US this afternoon, there is a speech by the Federal Reserve. For more information on how these releases may affect exchange rates, please contact us today.

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