by Adam Solomon
Sterling / Euro and US Dollar exchange rates
The Pound continued to decline against the Euro and also came under renewed selling pressure versus the U.S Dollar yesterday, after the Bank of England minutes showed that policy makers voted unanimously to expand the size of the bond-purchasing program by £75 billion. The nine-member committee raised the ceiling of the quantitative easing plan to £275 billion and a unanimous vote indicates that policy makers could expand the program even further should the economic recovery continue to be sluggish.
UK gross domestic product rose just 0.1% in the revised estimate for the second quarter and a subdued figure is expected for the third quarter, possibly a contraction in growth. The minutes also revealed that the MPC debated whether to expand asset purchases by £100 billion before settling on £75 billion. All nine policy makers also voted to keep interest rates on hold at 0.5%.
The minutes said that “heightened awareness of the vulnerabilities associated with the indebtedness of several Euro-area governments and banks had led to a further deterioration in demand prospects. While the worst risk had not crystallized, the threat of them doing so had resulted in severe strains in bank-funding markets.”
There was widespread speculation that officials would delay an increase in quantitative easing until November when policy makers would have the latest quarterly forecasts. Still, the MPC decided that a delay in announcing further asset purchases could prove more damaging. Mervyn King said in a speech earlier this week that “for the time being, a significant degree of policy stimulus is appropriate to support demand.”
The minutes came just a day after a government report showed that UK inflation accelerated to 5.2% in September, more than double the Bank’s 2% target and the fastest pace since September 2008. The BoE predicts that inflation will fall sharply over the coming year, allowing the MPC to loosen policy further by introducing further stimulus measures if necessary.
The minutes concluded that recent indicators suggest “that the underlying rate of growth had moderated and would be close to zero in the fourth quarter. Ernst Young LLP’s Item Club earlier this month cut its 2011 UK economic growth forecast to 0.9% this month and said the second bout of quantitative easing may not be enough to stop the economy shrinking.
The Pound treaded lower against the majors following the release of the minutes and was unsettled by fears over the domestic economy. However, the Pound continued to gain appeal from its position outside the Euro-zone recovering towards 1.1450 by the close of trading last night. The UK currency also remained largely unchanged at 1.57 versus the Dollar, as risk appetite improved with the increase in U.S stocks.
There could still be sharp swings in risk sentiment over the next few days, especially given the vulnerability in the UK banking sector. The focus this morning will fall on the latest retail sales data for September and the report is expected to show a sustained drop in sales on the month, which is likely to weaken the Pound, amid fears that a drop in consumer spending will hamper the recovery.
Euro / US Dollar exchange rates
The Euro weakened against the Dollar and the Yen yesterday, falling for the first time in days, as a French-German split over Europe’s debt crisis solution emerged prior to the meeting in Brussels starting on Friday. A disagreement over the European Central Bank’s role threatens to delay any announcement of a proposed resolution and that could undermine the Euro.
The Euro initially found support in the region 1.3750 against the Dollar and rallied to a high above 1.3850 before selling off towards the close last night. In the U.S, the latest housing starts data was stronger-than-anticipated with a gain to 0.66 million for September and there was a more positive tone following the NAHB index.
The headline consumer price index rose in line with expectations at 0.3%, while the core reading was slightly lower than expectations at 0.1%. The net impact was to lessen recession fears to a degree, although the tone remained very cautious. The Euro failed to hold the 1.38 level and dipped sharply last night ahead of the EU summit meeting.
Today’s Exchange Rate Data
U.K 09:30 – Retail Sales (September)
U.S 13:30 – Initial Jobless Claims (w/e 15th October)
EU 15:00 – Flash Consumer Confidence (October)
U.S 15:00 – Existing Home Sales (September)
U.S 15:00 – Leading Indicators (September)
U.S 15:00 – Philly Fed Business Survey (October)