The fallout from the Bank of England’s decision to swap £50 billion worth of UK government bonds for mortgage securities was greeted with cynicism from the market as the Pound plunged against both the Euro and the Dollar amid suggestions that the Central Bank is following in the Fed’s footsteps.
The Bank of England and particularly the governor, Mervyn King, has endured a barrage of criticism over their handling of the credit crunch with the Bank reluctant to enter an environment where banks and lenders would start relying on emergency funding to get them out of financial difficulty.
Initially, the Pound continued to struggle yesterday, falling against 11 of the 16 most actively traded currencies amid speculation that the turmoil surrounding credit markets will rage on.
According to a former MPC policy maker, the Bank’s initiative has a small chance of revitalising the depleted UK housing market as prices drop in most areas of the country.
The Pound fell a further 0.1% versus the Euro and remained virtually unchanged against the Dollar despite news that the Royal Bank of Scotland Group plc were preparing to sell £12 billion in shares in an effort to boost capital.
However, by midday the Pound had recouped those losses and began to make significant gains against the majors, rising above the resistance at 1.9896 versus the Dollar to close just under the $2.00 barrier last night.
The sharp intraday volatility surrounding the Pound can be attributed to news that the Finance Minister Alistair Darling is set to meet key mortgage lenders with hopes of convincing to cut the cost of home loans.
Euro and Dollar buyers may wish to place a stop order in the market to protect against a further downside move as the focus today will inevitably fall on the release of the minutes from the Bank of England’s last policy meeting and the Pound is under pressure in the build up to the announcement.
The MPC are expected to have voted unanimously to cut interest rates in April but a split decision will obviously revive Sterling sentiment as the probability of a back to back rate cut in May will all but diminish.
The Euro surpassed the $1.6000 barrier versus the Dollar for the first time ever yesterday and further gains are likely in the near-term as ECB governing council member, Christian Noyer, reiterated concerns over consumer prices and insisted that the Central Bank must restrain inflation.
The harmonised index of European consumer prices showed that inflation had risen to 3.6% year-on-year in March while the overwhelming increase in commodity prices combined with rising wage demands will force the ECB to retain a tightening bias in the months ahead.
Despite the fundamental lack of European economic data this week, the Euro will probably consolidate above the $1.6000 level and continue to make gains against the Pound as the diverging interest rate expectations between Europe and the UK become increasingly wider.
The Dollar declined against the Euro yesterday, recording a fresh record low before retreating back towards the $2.00 level versus the Pound after existing home sales fell in March while tighter lending restrictions deterred buyers.
Sales plummeted 2.0% from the previous month, which was actually less than forecast, although the median sales price actually fell 7.7% from this time last year as rising foreclosures weighs on confidence and dims the prospects for economic growth.
The housing slump has raged on for three years now as defaults on subprime mortgage loans led to tighter borrowing conditions while falling property and rising foreclosures sends the economy hurtling towards a recession.
The downturn in consumer confidence is also hurting the economic outlook and with oil prices hitting a record high of $119 a barrel yesterday, the Fed have little choice but lower interest rates by a further 25 basis points and ignore the risks to inflation.
Data Released 23rd April
U.K 09:30 BoE MPC Minutes
EU 09:00 Flash PMI Manufacturing (April)
– Flash PMI Services
EU 10:00 Industrial Orders (February)
written by Adam Solomon
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