Bank of England decide not to pursue QE, for now..

Friday 7th June 2012
Good morning. The markets remain very volatile with the Pound/Euro rate continuing to be pulled in two directions. Only yesterday we saw lows in the €1.22’s and highs touching €1.24’s, illustrating just how unpredictable things are at the moment. So today I’ll take a look at what is pulling the rate; Fears of Spain having debt trouble, and when the Bank of England are likely to pursue Quantitative Easing.

The Bank of England and Quantitative Easing

Yesterday the Bank of England left it’s interest rates at 0.5%, and left quantitative easing unchanged at £325bn despite mounting speculation that it would take steps to stimulate growth this month. Before the decision, it looked like around 25% of analysts thought they would pursue more stimulus, and so this was partly priced into the value of the Pound.

When they announced no change for the moment, the Pound then corrected to the upside. If you look at the chart, you can see the instant reaction at 12:00pm yesterday when the announcement was made.

I actually thought there was an outside chance of them announcing further stimulus. Indeed the decision contrasts with the recommendation from the International Monetary Fund (IMF), which last month urged the Bank to restart QE to help restore Britain’s faltering recovery.

I now expect a much higher chance of further Quantitative Easing in July. It’s likely that they have simply held off, as should the situation in Europe deteriorate further, they will have this in their back pocket to try and stimulate growth. So, expect a rocky road for Sterling in the coming months.

Spain issues spook the market

There have been reports in the past few days that Spain was seeking an immediate bailout from eurozone funds. I recent weeks I have been warning that behind the headlines about Greece, Spain and other EU countries are facing serious problems. There is every likelihood that the EU will see a domino effect with debt issues spreading.

Spain’s economy minister has since dampened speculation that the country is about to seek a bailout of its bank sector, saying that no decision would be made until audits of the banks were completed, possibly by the end of June.

Giving some support for the Euro was strong demand for Spanish bonds at an auction on yesterday, which was seen as a key test of the country’s ability to raise funds, but it had to pay a higher interest rate. The rate on the 10-year bonds was 6.044%, up from the 5.743% paid when bonds were last sold in April.

What next for Pound/Euro exchange rates?

I wish I could foresee what will happen, but unfortunately nobody can! On the one hand, the Euro is being pulled down by the well publicised problems with Greece and Spain. I think the Euro will continue to get weaker.

Will the Pound/Euro rate go up though? I don’t think it has much further it can go. It peaked several weeks ago in the €1.25’s, but speculation on QE in the UK will likely limit any further gains. Being in recession with more QE widely predicted, I can’t see where any Sterling strength is going to come from .

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