by Adam Solomon
The Pound received a timely and welcome boost yesterday, after the Bank of England elected against further quantitative easing this month and left emergency stimulus unchanged at £200 billion. The MPC also left interest rates on hold at a record low of 0.5%, as officials debated whether to increase bond purchases to support the economic recovery.
The minutes of today’s meeting will be released towards the end of October and may reveal the first three-way split since November last year. Policy maker Adam Posen has been quite vocal in his recommendation for further stimulus, while Andrew Sentance has been the sole voice for an interest rate increase for the past three months.
It seems neither party failed to convince their colleagues for a majority as the committee held firm, preferring to wait until next month using new economic forecasts. At that point, the BoE will also have more details on the extent of the public spending cuts, due on October 20th, and the U.S Federal Reserve’s plans to add more stimulus.
The Pound breached 1.60 against the Dollar after the decision and rallied from a five-month low versus the Euro, as speculators were left disappointed at the Bank’s failure to act this month. However, the recovery in Sterling didn’t last long, after a report showed that UK house prices plunged by the most on record in September.
The report from Halifax showed that the average cost of a home in the UK fell 3.6% from August, as the Bank of England consider increasing quantitative easing measures to support the recovery. Sterling fell towards another five-month low against the Euro, after recovering earlier in the day following reports that manufacturing unexpectedly advanced.
Lauren Rosborough, a senior strategist at Westpac Banking Corp, said prior to the announcement yesterday that “we don’t think there’s going to be additional quantitative easing, but will be kept on the cards as an option. Euro-sterling may be higher going into the Bank of England decision.”
Ross Walker, an economist at Royal Bank of Scotland Group Plc, said that “it was probably a three-way split and probably not just Posen on the dovish side. November really is finely poised. They could quite easily err on the side of caution from the growth perspective and add to purchases.” The Pound rose above $1.60 against the Dollar for the first time since February, but the UK currency declined heavily towards the close of trading last night.
A report from the National Institute of Economic and Social Research was released yesterday afternoon and showed that the pace of UK growth dropped by more than half in the third quarter. Gross domestic product increased just 0.5% in the three months through September, compared with a 1.2% gain in the second quarter.
The Euro tested resistance levels above $1.3950 against the U.S Dollar on Thursday and pushed to a high just above the $1.40 for the first time in eight months. The European economic data was better-than-expected, with an increase in German industrial production. The European Central Bank decided to leave interest rates on hold at 1% and Trichet’s comments were broadly in line with expectations.
Trichet also commented that he opposed disorderly currency moves and this will increase speculation that the G-7 will look to stabilise currency markets. The Euro was vulnerable to profit taking after rapid gains earlier in the session and following a failure to hold above $1.40, the single currency sank back towards $1.3850.
The U.S economic data was slightly better than initial estimates, with a decline in the weekly jobless claims to 455,000. The figure will boost optimism that there will be an increase in private-sector payrolls this afternoon, but underlying confidence in the economy will remain fragile with expectations of further Fed easing.
U.K 09:30 – Producer Price Index (September)
U.S 13:30 – Non-Farm Payrolls (September) – Average Earnings – Unemployment
U.S 15:00 – Wholesale Inventories (August)
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