Sterling has jumped to a nine-month high against a weak dollar, it also gained versus the euro after the Bank of England decision to keep rates unchanged and its asset-purchasing program on hold. The momentum has slowed slightly this morning but this these developments could signal the beginning of a longer term trend.
The central bank’s decision to pause their quantitative easing contrasted with an announcement by the U.S. Federal Reserve on Wednesday to buy a further $600 billion in government bonds to stimulate economic growth, which sent the dollar tumbling across the board.
Sterling’s gains following the BoE announcement suggest the market had priced in a small risk of the BoE opting for another round of quantitative easing (QE) after one policymaker, Adam Posen, voted for more QE last month. When the QE wasn;t extended we saw a brief relief rally.
“The immediate market reaction was that sterling strengthened and gilt prices fell, showing that there were at least some residual hopes that the MPC could signal a QE2 programme on the back of the FOMC (Federal Open Market Committee) announcement last night,” said Chris Huddlestone, head of money markets at Investec Treasury Solutions.
After the recent rise in GDP coupled with some positive ISM business and manufacturing figures it will take a very negative reversal for the BOE to extend the easing process any further and this can only be good for the pound. We might still lose some ground against the high yielding and commodity currencies like the Australian Dollar and Canadian dollar. The pound could also continue to lose against the likes of the Swiss Franc and Norwegian Kroner, clients who would like to benefit from some capital appreciation should certainly consider taking up some positions on these currencies.