Pound makes big gains against USD & EUR

Sterling racked up its biggest 1 day gain against a basket of currencies including the Euro and US Dollar in nearly a year yesterday, after a UK policymaker’s comments prompted speculation the Bank of England may not extend quantitative easing. Rates at 08:30am stand as follows:

  • GBP/EUR 1.0921
  • GBP/USD 1.6290
  • GBP/AUD 1.7658
  • GBP/NZD 2.1883
  • GBP/CHF 1.6558
  • GBP/CAD 1.6817
  • GBP/ZAR 11.904
  • GBP/JPY 148.03

Bank of England & Quantitative Easing
The reason the pound has been so weak recently, is due to the fact our interest rates are so low, and likely to remain so for a long while. Also, the QE measures were predicted to be extended, which has kept the pound low.

Monetary Policy Committee member Paul Fisher yesterday told the Financial Times the BoE’s interest rate cuts and injection of money into the economy via asset purchases were working, and it’s this positive view that caused yesterdays rally, even though there was little UK data out yesterday.

Sterling has come under heavy pressure in recent weeks, battered across the board on the view that UK interest rates will stay low and public finances will deteriorate further. The pound rose more than 2 percent at one stage against the dollar and the euro and more than 3 percent versus the yen, taking it to its highest in three weeks against the U.S. and Japanese currencies and to a 10-day high versus the euro.

“Fisher was implying that he thinks quantitative easing is working fairly well, which has led to talk that the policy may be withdrawn sooner than previously thought,” said Neil Mellor, currency strategist at Bank of New York Mellon.

The market is eagerly awaiting the November MPC meeting to see if the BoE extend quantititive easing. If they do not then we are likely to see a rally in sterling,” said Geraldine Concagh, economist at AIB Group Treasury in Dublin.

Mellor at the Bank of New York Mellon said, however, that the comments had done little to alter the negative picture on the UK currency. “Sterling’s plight is more about interest rates being on a floor and staying there, because the BoE is in no position to start thinking about raising rates at all,” he said. “This could be the perfect selling opportunity,” he added.

So, is this a sign of recovery for the pound, or simply a short term spike that will correct itself in the coming weeks? Impossible to tell. Markets will look to Novembers BoE meeting to see if more QE is announced. If this becomes more likely, expect the pound to fall. If it is less likely, then my view is Sterling cant simply climb and climb, as the fact remains that we are still in recession, and our rates are going to remain low for some time.

Again today, there is little economic data of note. There is however various measures from the USA, and it is this that has helped boost the pound. When there is good US data, in the past this would have strengthened the USD and made no difference to Sterling. In the current climate however, and good news from the states is a sign of global economic recovery, and so this boosts risk sentiment and thus drives investment towards riskier currencies such as the pound.

We saw this yesterday, as better than expected US data helped the pounds run yesterday. Stock markets were also up across the board, and you can read a breakdown of the gains in this BBC article.

Have a great weekend.

Todays Data
EU – Trade Balance
Can – Consumer Price Index
US – Industrial Production
US – Consumer Sentiment

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