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Quantitative easing dominates currency exchange markets

Market CommentaryQuantitative easing dominates currency exchange markets

Sterling Overview

As expected the Bank of England (BoE) left interest rates unchanged at 0.5% with no additional quantitative easing (QE) at this month’s Monetary Policy Committee (MPC) meeting. Many analysts thought that further QE may have been announced, however upbeat Q3 GDP, which showed growth at 0.8% rather than the 0.4% forecast meant the MPC have left further QE on hold (for the moment). Immediately after the announcement sterling made gains against many currencies, boosted further by a Halifax housing report displaying 1.8% gain.

Unlike the US where further QE will begin shortly Mervyn King and the BoE will sit tight before entering any further asset purchasing following signs of strength in the UK economy. UK services PMI increased to 53.2 coming in above forecast and representing the highest figure since June and Purchasing Managers Index figures came in at 54.9 against an expectation of 53. A figure above 50 in both releases represents expansion whereas below 50 contraction in the sector. UK construction PMI was weaker than expected but generally speaking recent economic data has been upbeat.

Earlier in October the pound dropped sharply against the euro following concern over the US recovery and a shift in reserves from US dollars to euros by investors. A reluctance to hold US dollars has seen the euro gain significant value and some analysts expect this trend to continue. On a positive note for the UK this will help keep sterling lower against the euro in the short-term and make exports more attractive, thus aiding UK growth.

Clearly there is a lot going on affecting sterling at the moment, so as always for a more in depth view on your particular currency please speak directly to your currency dealer at Pure FX.

GBPEUR

The European Central Bank (ECB) followed the BoE in leaving economic policy unchanged with no advance in QE and interest rates remaining at 1%. Jean-Claude Trichet, the ECB President spoke as usual following the announcement, although his comments only reinforced previous statements when he said the unconventional liquidity support measures currently being used by the ECB were temporary. Analysts had hoped he may reveal more on the ECB’s inflation outlook however given the current sovereign debt concerns it seemed he was keeping his cards close to his chest.

Despite a recent surge in the euro, underlying economic problems will still not go away. In spring eurozone sovereign debt was the focus of the FX markets and euro weakness was clear before a rescue package introduced by the ECB provided the euro with some much needed support. More recently cracks have begun to appear again as Portugal failed to reach an agreement on their budget, Ireland announced further fiscal cutbacks and Greek officials admitted they still have a huge mountain to climb causing bond yields to spike.

GBPUSD (Cable)

The US dollar has arguably been the most talked about currency these past few weeks as concern over a stall in the US recovery has grown and speculation about how rather than if QE will be required. On Wednesday the highly awaited FOMC rate decision did not disappoint as the Federal Reserve announced a second round of QE to the tune of $600bn, which will be introduced at a rate of $75bn pcm until June 2011. Interest rates remain at 0.25% and on this evidence it seems they will remain low for some time, although most analysts feel it is only a matter of time before QE3 is introduced totalling $1-2tn. The dollar has since fallen to 9 month low against sterling, a 10 month low against the euro and a 28 year low against the Australian dollar.

GBPCAD (Loonie)

The Canadian Reserve Bank maintained their stance on economic policy keeping the key interest rate at 1% at October’s meeting. It looks like the Canadian economy is again slowly gaining momentum with economic growth figures coming in very close to expectation and on another mildly optimistic note both output and employment have now returned to pre-recession levels. Canada’s growth picked up in August following 4 months of below-par performance including a shrinking of the economy in July. Canada suffered mildly by comparison to the US, mainly because both government stimulus and low interest rates worked more effectively. However the government is preparing to make cutbacks on stimulus spending, and the economy is only expected to maintain modest growth.

GBPAUD

Despite much speculation over the past 2 months the recent 0.25% raise in interest rates by the Reserve Bank of Australia (RBA) caught the market by surprise. It was medium-term inflation that lead the RBA to increase the cash rate to 4.75%. And further interest rate rises cannot be ruled out, especially given the economic growth on the back of commodities and positive economic data being released in China.

GBPNZD (New Zealand dollar)

Interest rates remain unchanged at 3% in New Zealand although the Kiwi dollar has continued to gain momentum trading at a 30 month high against the US dollar. Positive unemployment figures recently boosted the value however analysts still anticipate there will be no change in the cash rate until March next year.

We hope this newsletter has been useful and for further information please contact your Pure FX Currency Dealer on +44 (0) 1494 671800. Nothing in the newsletter should be construed as advice or guidance as to when to buy or sell currency.

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