In light of some highly anticipated statements from their respective banks the Pound is trading at elevated levels against the US Dollar. Following the latest Bank of England Minutes report and Ben Bernanke’s Congressional Testimony the Pound to US Dollar exchange rate (GBP/USD) advanced by around 1.2 cents to settle just above 1.5200.
Sterling was boosted by the news that policymakers at the Bank of England voted unanimously 9-0 against any further quantitative easing measures at July’s meeting. Previous Monetary Policy Committee votes had seen a 6-3 split in favour of holding monetary policy but with Governor Mark Carney at the helm and economic indicators printing positively all members of the MPC came to the same conclusion: that additional QE was not necessary at this juncture.
Last month the UK Service Sector, which accounts for over 70% of British GDP, struck a 2-month high as all three UK PMI results posted positive readings, above the 50.0 level that separates growth from contraction, for the second month running. Jumps in UK Retail Sales and British House Prices have also added to the mood of optimism and second quarter Gross Domestic Product is forecast to come in at 0.5%-0.6%.
However, Sterling took a steep tumble to a 3-year low of 1.4813 (GBP/USD) earlier this month as the BoE took the unusual decision to release a policy statement even though the Central Bank had elected to hold the current rate of monetary easing. The policy statement contained a considerable case of forward guidance with the BoE hinting that record low interest rates could become a permanent fixture for the foreseeable future, which heightened speculation that further monetary loosening was on the cards. Subsequently traders castigated the Pound in reaction to the Bank’s dovish tendencies.
Yesterday’s BoE Minutes report struck a far-less-dovish tone as the Central Bank indicated that asset purchases were unlikely to be increased in the near future:
“Given the already large size of the asset purchase programme, there was merit in pursuing a mixed strategy with regards to the different policy instruments at the Committee’s disposal”.
It is widely accepted that the benchmark interest rate will remain at its current record-low 0.50% for some time, but it is the prospect of more inflationary, yield-destroying QE, that is the real threat to the Pound in the minds of investors. With MPC members adamant that no enhancements were necessary to the BoE’s current £375 billion target Sterling was allowed to soar against the US Dollar, plus a basket of other major currencies.
In the afternoon Federal Reserve Chairman Ben Bernanke insisted that the US Central Bank’s monetary policy was dependant on the health of the US economy and therefore not pre-destined to be tapered:
“Our asset purchases depend on economic and financial developments, but they are by no means on a pre-set course”.
The dovish statement stifled the hopes of US Dollar traders, who had anticipated a more positive outlook for the US economy involving further hints towards a slowdown of QE3.
However, Bernanke did re-assert his stance from June that if employment figures and the rate of CPI inflation continue to move in the right direction then asset purchases will be tapered later this year with a mind to a complete shutdown of the proverbial printing presses by mid-2014. This positive spin left investors sitting on the fence as to whether QE3 could be cooled down as early as September, as previously estimated, and subsequently the Pound remained over a cent up against the US Dollar at 1.5200 (GBP/USD).
Comments are closed.