The Pound (GBP) Gets a Boost from GDP Data

on Oct 26, 2012
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The pound was the strongest climber against the US dollar yesterday, after data showed that in the third quarter the UK economy expanded by more than analysts had forecast. With the Bank of England scheduled to decide whether to extend its asset-purchasing programme, a change in expectations on the extension of QE due to the positive GDP data could provide further support to the sterling.

**Pound Jumps to a Three-Week High**
The pound gained 0.6 percent against the US dollar to hit a session high of $1.6144 after the UK Office for National Statistics reported that the British economy had expanded one percent in the third quarter of 2012, ahead of expectations of a 0.6 percent increase. In addition, sterling outperformed other major currencies, advancing by 0.7 percent against the euro.

“The pound is getting a boost from the GDP data coming in quite a bit above market expectations,” noted Ian Stannard, head of European foreign-exchange strategy at Morgan Stanley (NYSE:MS), as quoted by Bloomberg. “We could now see the pound strengthening more, particularly against the euro.”
**Bigger Picture**
!m[The Report Questions The Case For Another QE Round](/uploads/story/648/thumbs/pic1_inline.png)Despite the positive data, however, some analysts believe that the pound is likely to drop, given that the GDP figures reflect the Olympic-boosted growth in the third quarter. “Although the data is strong and sterling will probably enjoy that for the next couple of days, the bigger picture is weak and for a weaker currency,” noted Mr Stannard, as quoted by Bloomberg. Mervyn King, governor of the Bank of England, said that the UK’s recovery was proceeding at a “slow and uncertain” pace, and adding that a “zig-zag” pattern was likely to persist.

**Bank of England to Decide on Whether to Initiate Another Round of QE**
The positive GDP figures, pointing to an end to Britain’s double-dip recession, have prompted investors and analysts to reduce expectations that the Bank of England would implement another round of quantitative easing. The Bank of England, which is scheduled to meet on November 7-8, has to decide whether to end its asset-purchasing programme, or to extend it beyond £375 billion. “Today’s report strongly questions the case for another round of QE,” said Audrey Childe-Freeman, head foreign- exchange strategist at the Bank of Montreal (TSE:BMO), as quoted by Bloomberg. “A change in expectations on that front should prove supportive for sterling.”

**Yen Falls, Greenback Mixed against Majors**
In the meantime, the FT reported that the yen fell to its weakest level in four months, with traders selling the Japanese currency in anticipation of an upcoming policy meeting of the Bank of Japan when the central bank is expected to try to weaken the yen further. 98 percent of clients polled by the Japanese bank Nomura expect some form of additional monetary easing.
The US dollar rose more than 0.5 percent versus the yen, reaching ¥80.33; however, the greenback’s performance was mixed against other major currencies with the Federal Reserve making no changes to its monetary policy ahead of big fiscal policy decisions expected after the US presidential election in November.

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