Pound at risk of more falls; QE and GDP figures

Wednesday 5th October 2011
Good morning. Sterling fell to a 13 month low against the US Dollar yesterday, and was under pressure against the Euro after weak UK construction data added weight to speculation the Bank of England may resort to more easing. Despite Italy having it’s credit rating downgraded, GBP/EUR rates remain lower due to the threat of QE. At 08:30 this morning rates are as follows:

GBP/EUR 1.1585
GBP/USD 1.5428
GBP/AUD 1.6154
GBP/NZD 2.0272
GBP/CHF 1.4218
GBP/CAD 1.6274
GBP/ZAR 12.541
GBP/JPY 118.32
GBP/DKK 8.6202
GBP/NOK 9.0654
• EUR/USD 1.3314

Pound under pressure due to Quantitative Easing risk

Yesterday poor construction data increased the chance of monetary easing from the BoE this week. So what do the analysts say about possible QE?

“Any individual piece of data that reinforces the message the economy is not in fantastic shape and points to the Bank potentially implementing further (quantitative easing) will get a negative response from the currency,” said Michael Derks, chief strategist at FX Pro.

“The extraordinary risk aversion we continue to see in the equity and commodity markets also contributes to the case for more monetary easing.”

The Pound has been weakening of late due to the fact more QE may be needed to revive the flagging economy. Another round would flood the market with the UK currency, reducing demand and pushing exchange rates lower.

Problems with EU debt had been keeping the GBP/EUR rate quite high, but the QE risk is pulling the Pound back down. We’re at the lowest in more than a year against the US Dollar.

George Osborne said earlier in the week he would support any such move, and that the Bank of England could announce more easing as early as this week on Thursday. This is keeping the Pound weak.

Italy credit rating downgraded

The Italian government’s credit rating has been slashed by Moody’s from Aa2 to A2 with a negative outlook. The ratings agency blamed a “material increase in long-term funding risks for the euro area”, due to lost confidence in eurozone government debts.

Moody’s said that Italy could be further downgraded to “substantially lower rating levels” if a further deterioration in investor sentiment made it even harder for the country to raise cash from the markets. The news came after markets had closed yesterday, but this morning there has not been a significant gain in GBP/EUR as the QE risk as mentioned above is keeping rates in check.

Today’s Data

The most important data today is Gross Domestic Product data for the UK and EU. This will show how the relative economies are performing and could have a big impact on GBP/EUR rates. If the UK figures are worse than expected rates could fall. Either way we expect some significant movement on sterling vs euro rates today.

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