Sterling(GBP) Climbs against Dollar(USD) as BoE Maintains QE Policies

on Oct 4, 2012
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The British pound (GBP) inched up against the dollar (USD), rising from a more than a three-week low after the Bank of England (BoE) kept its bond purchase programme and interest rates unchanged, Reuters reported on 4 October 2012. Despite the upwards movement, the UK currency remains under pressure amid prospects of more monetary stimulus in the coming months.

The Bank of England’s latest meeting did not have a profound effect on sterling trading, as GBP/USD continued to trade slightly above 1.6100, where resistance could be provided by the key 1.6200 figure. Yet, the pound rose 0.3 per cent to $1.6119 as of 12:50 p.m. London time, recovering from its previous day’s drop to $1.6067, the lowest level since September 12. Meanwhile, the pound stayed lower against the euro (EUR), slipping 0.1 per cent to 80.37 pence per euro, as the single currency was strengthened by the European Central Bank’s (ECB) decision to keep its main refinancing rate at a record-low 0.75 per cent.

The mild push to the pound came after the end of BoE’s two-day policy meeting. The central bank kept interest rates on hold at 0.50 per cent and its quantitative easing programme unchanged at £375 billion. This decision supported the UK currency, but according to analysts, it is likely to see the pound struggling again in near future as the economy continues to flag.

Craig Erlam, market analyst at UK foreign exchange broker Alpari, told Reuters: “People were expecting policy on hold with the focus now shifting to the next month. We expect the pound to come under pressure as there are plenty of expectations that the BoE could do more asset purchases next month.”
Other analysts agreed that the pound may be pressured as early as next month as by November’s meeting, the central bank is expected to have finished spending the extra £50 billion of stimulus that they voted to add in July, which could increase the chance of the bank choosing to add yet more stimulus. The BoE has not commented on the prospects of further monetary easing. According to its official statement, the quantitative easing programme will remain under review.

Recently, sterling has come under a lot of pressure as on Friday (28 September), credit rating agency Fitch Ratings said that the United Kingdom has “very limited fiscal space, at the ‘AAA’ level, to absorb further adverse economic shocks in light of the UK’s elevated debt levels and uncertain outlook.”
Accordingly, the French-based rating firm warned that Britain’s AAA rating could be at risk and a downgrade would further damage the pound’s reputation as a safe haven for investors. Softer-than-expected economic data also highlighted the fragility of the UK currency. Composite of this week’s data releases suggested the UK economy is extending a recession that started late last year as output wilted under the pressure of government austerity and the Eurozone debt crisis.

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