Quantitative Easing effect on Exchange Rates

Thursday 9th February 2012
Good morning. Sterling was down against most currencies including the Euro and US Dollar, as markets brace for more Quantitative Easing today from the Bank of England. This is what we will focus on today, and look at what effect Quantitative Easing may have on Sterling exchange rates. First, let’s look at how rates moved throughout trading yesterday:

~Currency Movements on Wednesday 8th February 2012~

Quantitative Easing and the effect on Sterling exchange rates

Today at 12:00pm, the Bank of England will announce if they are changing interest rates, and also if they will pump more money into the economy through their QE programme. It’s expected that they will announce a further £50 billion of stimulus, in an effort to bolster the UK’s struggling economy. QE involves flooding the market with more pounds and usually weakens the currency. Indeed last time the BoE pumped money in, the Pound fell across the board.

So what effect could it have? As the forecast is for £50 billion and this is already expected, for the most part this will already have been priced into exchange rates. This is why we have seen the Pound fall in recent days. If they decide to opt for more than £50bn, then it’s very likely the Pound will fall further.

On the other hand, if the BOE does not opt for more QE, or opts for less than the £50k that has been forecast, it could give a boost to the Pound.

Recent UK data has been a mix of good and bad, and this has hindered accurate forecasts on what will happen today. Some say that the recent good data means that they may not need to pursue more QE at this stage.

Opinion is mixed though. with some arguing that the economy is on the brink of a recession and will need monetary easing especially given that fiscal policy is being tightened. It’s therefore likely that UK monetary policy may weigh on sterling.

Euro could also gather strength as a solution to the Greek debt talks seems on the cars.

This has strengthened the Euro and made it more expensive to purchase, compounding the fall in GBP/EUR rates.

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