Bank of England introduce QE3
The Bank of England decided to introduce further quantitative easing last Thursday. Another £75 billion of asset-purchases were announced in order to boost the UK’s struggling economy and safeguard it from potential shockwaves that may come as a result of financial stresses in the eurozone. Sterling dropped sharply across the board but losses were soon reversed. The market was confident that the measure would be adopted in coming months so there were no great surprises, though the size of the programme was slightly above consensus. The noises out of the MPC suggest that there is scope for further monetary stimulus in the UK, given the long-term downside risks to UK growth and inflation.
The recent sector-by-sector growth figures were actually reasonably encouraging; contrary to expectations of a slowdown, we saw expansion in the manufacturing and key services sectors accelerate, though the construction sector now only teeters above negative territory. In truth, it is going to be events outside the UK that determines sterling’s performance in coming months.
Merkel and Sarkozy ‘commit’ to action in three weeks
The euro has started this week very strongly, gaining two and a half cents against the dollar and over a cent against the pound. Merkel and Sarkozy have announced that they are going to take action to recapitalise Europe’s banks, settle the Greek issue and improve economic growth in the eurozone. There was no reiteration of the “Greece cannot fail” pledge of a fortnight ago, which perhaps shows that EU leaders have come to accept the need for Greek debt to be restructured (which will involve significant haircuts). Certainly the recapitalisation of Europe’s bank looks to be a prelude to a write down of Greek debt.
The news has been taken positively, with ‘Merkozy’ setting a November 3rd deadline at which they intend to deliver a comprehensive plan. The market has been disappointed time and again by missed deadlines, but the euro has rallied regardless. The single currency was also given a boost by the absence of a cut to the eurozone interest rate at last week’s ECB meeting.
With regards to the approval of changes to the bailout fund, only two countries are yet to ratify; Slovakia and Malta. There is a significant risk of a disappointment from the former nation, where the vote is finely balanced.
US non-farms help to boost risk appetite
Last week’s monthly US non-farm payroll figure posted twice as many new jobs than expected. This, combined with optimism with regard to the eurozone debt situation, has improved market confidence and boosted riskier assets. Accordingly, safe-haven assets such as the US dollar have weakened. The euro has reversed some significant losses to the dollar and the GBP/USD rate has bounced with it.
Sterling is trading below €1.15 this afternoon, whilst it is back up towards 1.57 against the US dollar. The EUR/USD pairing looks hard-pushed to make significant gains beyond its current $1.3650 level, which is likely to cap further gains for GBP/USD. Sterling looks oversold at 1.1460 against the euro, but with the optimism surrounding the euro today, we may have to look beyond this week for a bounce.
End of week forecast
GBP / EUR 1.1450
GBP / USD 1.57
EUR / USD 1.37
GBP / AUD 1.55
Senior Analyst – Caxton FX
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