GBPEUR/GBPUSD

Following on from last week, the Pound rallied against the Dollar and the Euro on Thursday, 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 last 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 the 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. The 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.

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.

Mike Jones, a currency strategist at Bank of New Zealand Ltd, said that "the BoE is sounding a little more upbeat on economic prospects and has increased its quantitative easing program by less than expected. As a result, the Pound is finding strength." The Pound is currently trading at the highest level since October 23rd against the Dollar, gaining 1% on the week.

The Pound has risen for a second consecutive week against the U.S Dollar, touching a high of $1.6634 on Friday, after UK producer prices rose for an eighth straight month in October. Oil and import costs rose, while manufacturers sought to defend profit margins damaged in the longest recession on record. The report shows that factories have the scope to raise prices, as the recession shows signs of ending.

The Pound's resolve will be tested again this week, as the focus switches to the Bank of England's quarterly inflation report on Wednesday. As well as up to date growth and inflation predictions, the report should provide a further insight into the terms of the Central Bank's decision to increase the bond purchasing program by a further £25 billion.


EUR/USD

The Dollar slumped to a near one-week low against the Euro on Thursday, 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 showed that the jobless rate soared to a 26-year high of 10.2% in October, as employers cut more jobs than forecast.

Non Farm Payrolls fell by 190,000 last month, compared with a 175,000 drop anticipated, underscoring why the Federal Reserve policy makers say that interest rates will remain near zero over an extended period. Stocks subsequently fell as the Standard & Poor's 500 index slumped 0.4% but the Dollar failed to find any momentum, amid speculation that a weakening labour market will delay a rise in borrowing costs.

The European Central Bank elected to keep interest rates unchanged at a record of 1% last week, 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 9th November

EU 09:30 Sentix Investor Confidence Index (November)

GER 11:00 Industrial Production (September)


written by Adam Solomon

Labels: daily-insight