Sterlng falls sharply on BoE minutes

Thursday 23rd June 2011
Good morning. Sterling had a very poor day yesterday, falling broadly against other currencies after the Bank of England minutes showed there may be further Quantitative Easing and no chance of an interest rate hike any time soon. Today we will look at why the Pound has fallen so much against the Euro, and the prospects for the coming weeks. At 08:30am this morning rates are as follows:

  • GBP/EUR 1.1226
  • GBP/USD 1.6025
  • GBP/AUD 1.5208
  • GBP/NZD 1.9660
  • GBP/CAD 1.5590
  • GBP/ZAR 10.856
  • GBP/JPY 129.01
  • GBP/DKK 8.3720
  • GBP/NOK 8.7629
  • EUR/USD 1.4270

Sterling falls on Bank of England minutes

Yesterday the minutes to the recent BoE decision to hold rates showed the 9 member committee voted 7-2 to hold rates. The new member Ben Broadbent voted to hold rates, in stark contrast to his predecessor who had consistently voted to raise rates. This signalled that interest rates in the UK are likely to remain low for some time, and there is now a greater chance of more Quantitative Easing.

Sterling fell nearly 1% against other currencies as a result.

What do the analysts say?

“This is the first time in many months that we see other MPC members than Adam Posen talking about more QE,” said Valentin Marinov, strategist at Citi.

“We think we could see sterling moving lower still on the back of the BoE minutes against the dollar and the euro. Given that sterling/Swiss franc hit fresh all-time lows more stops could be triggered fuelling further correction to the downside.” So, it could well be Sterling continues to fall against other currencies, however the Greek debt problems will probably limit falls in GBP/EUR somewhat.

More Quantitative Easing?

MPC member Paul Fisher said earlier in the week that there is an increased chance of more quantitative easing, saying Britain’s economic recovery was fragile and more monetary stimulus may be needed if deflation risks mount. Markets are not pricing in a full quarter percentage point rate hike until June or July 2012, a sharp move from earlier this year, when a May 2011 rate rise was viewed as a likely option.

Expectations for when UK interest rates will rise from their record low level have been drastically pared in response to a run of soft data as the country enters a long period of drastic fiscal tightening. In contrast, the EU are likely to raise rates next month, and this could put GBP/EUR under further pressure.

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