Pound Falls on Expectation of More QE

on Jun 20, 2012
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On the expectation of more quantitative easing (QE), the UK pound fell 0.4 per cent against the US dollar to $1.5664 and 0.4 per cent against the Japanese yen to Y123.56, but recovered to trade up 0.2 per cent against both currencies as markets focused on a similar chance of easing on the other side of the Atlantic and in Japan.

After originally falling sharply, the sterling recovered to shrug off the release of the Bank of England’s minutes from its last policy meeting in early June which furthered a belief, already strengthened by falling UK inflation, that the BoE would increase its asset purchase programme at its next meeting in July. According to the BoE’s minutes, five members of the its Monetary Policy Committee voted to hold the asset purchase programme steady at its current level of £325 billion while four members, including Governor Mervyn King, voted to increase it by between £25 billion and £50 billion. What is more, the minutes revealed that “most members judged that some further economic stimulus was either warranted immediately or would probably become warranted”. Latest analysts’ forecasts are that a further £50 billion of extra asset purchases will be announced at July’s policy meeting.

!m[](/uploads/story/145/thumbs/pic1_inline.png)Meanwhile the latest figures from the Office for National Statistics could also raise the likelihood of further QE. The recently-released data showed UK unemployment claims increased unexpectedly in May. And although the expected further monetary easing is commonly considered bearish for the currency by increasing the supply of pounds in the system, traders said it could actually support the pound by boosting demand for gilts. With BoE demand supporting gilt prices, the UK government debt could become an even more appealing safe haven to investors looking to cut exposure to troubled euro zone sovereigns.

Apart from the BoE minutes, the outcome of the U.S. Federal Reserve monetary policy-setting is also likely to drive the price action, analysts said. Speculation of more QE from the Fed weighed on the U.S. dollar and lent support to perceived riskier currencies including the British pound.
According to market players, some investors would be disappointed if the Fed does not announce another round of QE and instead extends “Operation Twist”, a programme aimed at pushing down long-term borrowing costs by selling short-term securities to buy longer-term ones. In that scenario the U.S dollar could rebound broadly, as investors also re-focus on the debt problems in Europe.

At the same time in Asia, Japan reported its first trade deficit with the European Union since the Finance Ministry began tracking data in 1979, as the debt crisis limits a rebound in Japanese exports. Members of the Bank of Japan’s Monetary Policy Committee expect the Japanese economy to see modest recovery in the coming months. Nevertheless, a worsening of the euro zone crisis would see the Bank of Japan “stand ready to take appropriate actions without ruling out any options in advance,” minutes from the board’s meeting in May revealed.

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