This morning’s MPC minutes have weighed heavily on the pound today. The Bank of England’s rate-setting committee revealed that growth in the second half of this year is likely to be “materially weaker than forecast in August.” The minutes also indicated that a move towards additional UK quantitative easing “was finely balanced for most MPC members” and that “it was increasingly likely that [it] would be warranted at some point.”
Significantly, leading MPC dove Adam Posen was not joined by any of his colleagues in his call for an additional £50bn worth of asset purchases. However, the comments above really do look to be the precursor to further easing and the market has taken its cue to hurt the pound. Today’s news doesn’t come as too much of a surprise after the Bank of England’s third quarterly bulletin, which celebrated the effects of the last round of quantitative easing.
The market is now looking ahead to next month’s Bank of England meeting, where they may well finally pull the trigger on QE. The truth is that UK data is on a steady downtrend and most signs are really pointing towards a double-dip recession.
Sterling has come off highs up above €1.17, to trade at levels comfortably below €1.14 this afternoon. Do we see this lasting? Well, we find it difficult to envisage the euro maintaining this level of support in the medium term. There remains a sense that the next scare or damaging bad news headline from the eurozone is never far from view. Admittedly, the euro has traded robustly in the face of Italy’s debt downgrade yesterday but the Greek issue is still unresolved. In addition, sterling has suffered of late with the UK economy in the spotlight, but attention is likely to shift away until early October’s PMI data. This may give sterling a little breathing space over the coming week and a half or so.
Richard Driver
Analyst – Caxton FX
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