We have to hold our hands up and admit that we were caught
well and truly offside with respect yesterday’s MPC minutes. We did not even fully
expect David Miles to continue voting for QE but not only did he stand firm, he
recruited to additional doves to his cause in the shape of Paul Fisher and
(more significantly) Sir Mervyn King. With the merits of an interest rate cut also
carefully discussed, it was no surprise to see sterling take a beating as a
result. We have to now change our position on the BoE’s monetary policy outlook
and expect an additional top-up of QE around May time. Not good news for
sterling, which continues to suffer from weak growth and the high probability of
a UK debt downgrade.
By contrast, the minutes from the US Federal Reserve’s
recent meeting gave a real boost to the US dollar last night. They revealed
that Bernanke & Co are assessing when and how to scale back their QE3
operations, which was a major driver of dollar-weakness in the last few months
of 2012. There have been hints that substantial improvements to the US unemployment
rate would be needed before QE3 was wound down but the minutes revealed there
was some support for doing so before such improvements are seen. It goes
without saying that there remains majority support for maintaining QE3 as it is
until greater progress is made with the US recovery and no change to this looks
particularly imminent. However, the discussion and the divergence of views
within the Fed could lead to a tapering off of QE3 later on in the year. This
is why the dollar has rallied.
From the eurozone, we have had yet more weak growth data. A German
economic sentiment survey was excellent earlier on in the week but this morning’s
PMI figures pointed to a slowdown in the powerhouse economy this month. The
German manufacturing sector remained in growth territory by only the smallest margin.
Meanwhile, French figures pointed to a sharp dip further into contraction,
against expectations of stabilisation. The same is true for the eurozone as a
whole, which is set to contract again this quarter. This is being reflected in a weaker euro
today, though GBP remains very vulnerable.
Richard Driver
Currency Analyst
Caxton FX
