Sterling falls below $1.50 after Bank of England decision

Sterling fell sharply against the US dollar yesterday, retreating from a four-month high after the Bank of England extended its quantitative easing program. Surprising traders, who had not expected an announcement so soon, the central bank committed an extra £50 billion to its UK asset buying scheme. Most had expected the BoE to wait until the end of the initial three-month period to decide whether more funds would be required to increase market liquidity, and the markets reacted by selling the “riskier” pound for the perceived safe-haven of the greenback. In early trading the pound had strengthened against the dollar after Barclays announced healthy pre-tax profits of £1.37 billion, up 15% compared to a year earlier. After a week of strong London equity market performance, this news further buoyed investor sentiment that a global economic recovery may soon be underway. However, as the Bank of England’s interest rate decision approached at midday, several traders decided to offload sterling to reduce their exposure before the potentially market-moving announcement. The bank’s announcement that they were to hold interest rates at 0.5% was of little note to the markets, however its decision to extend its quantitative easing program surprised many market participants and, as a result, sterling fell heavily against the dollar at lunchtime yesterday.

The pound’s losses were further extended against the dollar yesterday evening as ten US banks were ordered by regulators to raise $74.6 billion to ensure they had sufficient capital should the recession get even worse. The so-called “stress tests” revealed that Bank of America, Wells Fargo, GMAC, Citigroup and Morgan Stanley will need to raise $33.9 billion, $13.7 billion, $11.5 billion, $5.5 billion and $1.8 billion respectively to offset a worst case economic scenario. The banks will be given until 9th November to raise the necessary capital, before being offered a further bailout by the US government. The release of the “stress test” results further extended the selling pressure on the pound, as investors became wary that a global economic recovery may still be some way off.

In early trading today the pound has pared some of yesterday’s losses, as investors continue to digest the results of the US “stress tests,” with some market participants feeling that they may have removed some of the uncertainty surrounding the US financial system. There are some important announcements due on both sides of the Atlantic today: in the UK, April Month-on-Month and Year-on-Year Input and Output Producer Price Index figures are out at 9.30 BST, whilst in the US, 13.30 BST sees the release of Month-on-Month and Year-on-Year Average Hourly Earnings data for April. Also at that time, last month’s Nonfarm Payrolls, Unemployment Rate and Average Weekly Hours are out in America.