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