by Adam Solomon
Sterling / Euro and US Dollar exchange rates
The Pound declined heavily against all of the 16 most actively traded currencies yesterday, falling over 1% against the Euro exchange rate and the Dollar in under a minute, as the Bank of England announced that it would resume quantitative easing and purchase government bonds to the value of £75 billion. There was widespread speculation that policy makers would announce an extension to bond purchasing plan but the move to purchase £75 billion caught the market by surprise.
The initial decline in Sterling to the lowest level in nine months versus the U.S Dollar was short-lived, as the Bank of England’s decision improved risk appetite and increased traders’ appetite for higher-yielding currencies. The Bank of England also kept interest rates unchanged at a record low of 0.5% for the 28th consecutive month.
The increase in the asset-purchase plan, if any, was expected to be £50 billion but the move to increase the total amount of quantitative easing to £275 billion. The Bank of England stated that an easier policy was required to meet its medium-term inflation targets, comments which may come as a surprise given that inflation is more than twice the 2% target.
The Bank of England governor Mervyn King was very pessimistic in the tone and language used yesterday, particularly concerning the UK and global economy with the outlook damaged by a slower global economy and by the turmoil engulfing much of the Euro-zone. He also stated that the global economy is faced with the worst financial crisis since the Great Depression.
There may be some concern that the Bank of England has effectively panicked in announcing a £75 billion purchase in bond-purchases and the move may therefore may to inspire confidence. Mervyn King also said that he has lost faith in European government’s ability to resolve the sovereign debt crisis. The Bank’s decision to protect the UK from ongoing events in Europe may prove futile, amid concerns that failure to protect bank funding markets risks recreating conditions that led to collapse of Lehman Brothers Holding Inc three years ago.
Euro / US Dollar exchange rates
The Euro exchange rate generally consolidated ahead of the ECB interest rate decision, although there was a brief spike towards the 1.34 level on reports that the EU commission was back a more comprehensive recapitalization of the banking sector. The European Central Bank left interest rates unchanged at 1.5%, which was in line with market expectations, although a minority anticipated a cut in rates.
In the accompanying press conference, the ECB President Jean-Claude Trichet, in his final meeting, announced that the ECB would introduce long-term repo operations of 12 and 13 months to help improve liquidity. He also stated that the downside risks to the economy had intensified, but he was very careful not to make a commitment to lower interest rates.
The Euro initially weakened to test support below 1.3250, but then rallied later in the day as risk appetite improved. In the U.S, the latest initial jobless claims data recorded a small increase in the latest weekly figures, which will maintain hopes for a slightly better-than-expected non-farm payrolls report this afternoon.
Today’s Exchange Rate Data
U.K 09:30 – Producer Price Index (September) – Ouput
GER 10:00 – Industrial Production (August)
U.S 13:30 – Non-Farm Payrolls (September) – Unemployment – Average Earnings
U.S 15:00 – Wholesale Inventories (August)
U.S 20:00 – Consumer Credit (August)