GBPEUR/GBPUSD

The Pound rallied against the Dollar and the Euro yesterday, after the Bank of England raised its bond-purchasing program by just £25 billion, less than economists had predicted and for the third time since March. Policy makers are trying to cement the economic recovery, with the UK economy still languishing in the worst recession ever recorded.

The nine-member monetary policy committee, led by the governor Mervyn King, took the decision to raise the amount of bonds it will purchase with newly created money to an unprecedented £200 billion. That represents a smaller amount than many economists had anticipated and the Pound subsequently rallied against 12 of the 16 most actively traded currencies.

The Bank of England slowed the pace of bond purchases, amid signs that an economic recovery is gathering pace, giving policy makers the scope to wind down their money printing program next year. Policy makers are weighing up signs that the economy is shaking off the slump against risks the flow of credit isn't strong enough to underpin a revival.

In the accompanying statement, the Central Bank said that "on balance, the committee believes that the prospect for a slow recovery in the level of economic activity, so that a substantial margin of under-utilised resources persists. That will continue to bear down on inflation for some time to come."

The Bank of England also maintained the benchmark interest rate at a record low of 0.5%, while the European Central Bank meet at 12:45 and will also leave borrowing costs on hold at 1%. The Pound may struggle to hold on its recent gains made against the Euro if the ECB chairman Trichet gives any indication that Europe are preparing to exit emergency stimulus measures.

The government this week pledged more money to help two of the UK's biggest banks in Lloyds Plc and RBS Plc, boosting the scale of the world's most expensive bailout less than seven months before the general election. Colin Ellis, an economist at Daiwa Securities SMC Europe Ltd, said that size of the increase "is an indication that they're close to finishing. There's a good chance they could hold fire in February. Clearly they won't do anything until then."

The Pound rallied 0.7% against the Dollar in the minutes that followed the announcement, touching a high of $1.6630 in London. The UK currency also bolted towards 1.1200 versus the Euro, prior to the ECB interest rate announcement and accompanying press conference. Yesterday's decision was based on revised forecasts, which Mervyn King will present on November 11th, when the Central Bank publishes its quarterly inflation report.

The Chancellor of the Exchequer Alistair Darling granted the BoE the authority to expand the bond-purchasing program and said in a letter to the governor that the plan had provided a "welcome improvement" in corporate credit markets. Although the UK economy still languishes in a technical recession, he said that it is more likely that inflation will hit the 2% target.

The decision to expand the quantitative easing program followed a report on October 23rd that showed the UK economy unexpectedly contracted 0.4% in the third quarter. That extended the slump to six consecutive quarters, the most since records began in 1955, while the U.S, Germany, France and Japan all returned to growth.

The UK's struggle to return to growth has prompted some suggestions that the bond purchases are not having the desired effect. While services, manufacturing and house prices are showing encouraging signs of recovery, a gauge of money supply favoured by the bank fell 1.7% in the third quarter and unemployment increased to the highest level in 12-years.

Elsewhere yesterday, the Pound also received a boost as a report from the Office of National Statistics showed that UK manufacturing rebounded by more than initial estimates in September, from the lowest level since 1992. Factory output increased 1.7%, the biggest gain in seven years, a sign that the economy is starting to emerge from the recession.

James Knightly, an economist at ING Financial Markets in London, said that "rising confidence, combined with sterling weakness, appears to be supporting the recovery. This sets us up nicely for a positive fourth quarter." Sterling may continue to make gains versus the U.S Dollar, after UK stocks rose for a second day and risk appetite improved.


EUR/USD

The Dollar slumped to a near one-week low against the Euro yesterday, amid speculation that the Federal Reserve will trail other major Central Banks in ending economic stimulus measures. In addition, the monthly U.S employment report is released tomorrow and may show a modest improvement in payrolls, after jobless claims decreased more than forecast.

The European Central Bank elected to keep interest rates unchanged at a record of 1% yesterday, while the Euro found some support against the majors in the accompanying press conference. The chairman Jean-Claude Trichet said that officials will withdraw some of the emergency stimulus measures introduced to fight the worst recession since the Second World War.

At the press conference in Frankfurt, Trichet said that "not all our liquidity measures will be needed to the same extent as in the past" as the economy recovers. Central Banks around the world are beginning to wind down some of the measures introduced to stave off a second Great Depression and the Euro rallied as much as 0.4% against the Dollar after the statement.


Data Released 6th November

U.K 09:30 Producer Price Index (October) - Output

GER 11:00 Industrial Orders (September)

U.S 13:30 Non-Farm Payrolls (October) - Average Earnings - Unemployment

U.S 15:00 Wholesale Inventories (September)

U.S 20:00 Consumer Credit (September)

written by Adam Solomon

Labels: daily-insight