Yesterday the Bank of England did extend the Quantitative Easing Program, as mentioned in my last report, by an extra £50bn in a clear admission that the UK economy needs a boost. The move had largely been expected and initially there was little reaction for the pound other than a mild rebound as an interest rate cut was avoided.
However the implication for sterling exchange rates against most currencies bar the Euro was a slide as the afternoon wore on with many analysts questioning if QE hasn’t worked so far, why will printing more money suddenly turn the economy round? If UK data economic data remains negative in the coming weeks, which I suspect it will, then the pound may be heading back to the lows seen against the greenback, Aussie, Kiwi, and Rand seen earlier this year. I feel sterling will remain vulnerable because markets have not ruled out the prospect of a further interest rate cut in the UK if the economy remains mired in recession.
Whilst the fact that the European Central Bank would need to do something to assist flagging economies in Europe, the move to cut interest rates did catch many by surprise and certainly wasn’t “priced in” to the value of the Euro as it dropped sharply against the pound, racing back through 1.25, and the US Dollar, dropping below 1.24.
These levels are not far off the year lows against both currencies, and the press conference which followed suggested Draghi would be prepared to go further if European problems persisted. The problem for the single currency is that there is still no real common ground between Germany and other member states. Germany favours austerity and less action by the ECB and most of the rest (including France) are more in favour of spending to achieve growth and potentially allowing the ECB to become the bank of last resort in issuing euro bonds. With the political impasse not likely to be resolved soon the Euro could drift further. If sterling can hold on to its recent gains for a sustained period then the markets may force the Euro even higher in the short term however I suspect the UK economy may reign the pound back below 1.25 before long and drift back gradually.
Sterling Dollar exchange rates, or Cable as it is known, have remained relatively range-bound in the last month (again predicted in my last report) with neither currency able to muster enough strength from flagging domestic economies to break the range. The US is posting much stronger economic growth figures than the UK but the worryingly low level of new jobs being created stateside has led many to feel another round of Quantitative Easing is on the cards in the US.
As such todays Non Farm Payroll data (a measure of all new jobs created outside of the agricultural sector) will be very keenly watched. A strong showing will likely lead to more global confidence, but will also be good for President Obama in an election year. Weak figures will likely see a drop in global confidence and be used by Republicans as a sign US economic policy is failing. This is important because the US national debt will be a major electoral battleground and last time was the subject of political brinkmanship by both sides which nearly saw the US default on its debt and the Dollar race through 1.60.
If you have an imminent transfer either to or from USD then keep in close contact with your account manager at FCD today to make sure you can move quickly once the results are announced. Personally I feel that the problems in the Euro are likely to keep the Dollar strong as investors seek it’s safe haven status. At the same time I also feel the pound will likely slip as ever more weak UK data is announced and growth forecasts revised down further yet again. Don’t be surprised to see GBP USD rates back towards the 1.52 low within the next couple of months.
The Aussie Dollar pushed the pound even lower in trading yesterday following the RBA recently resisting market expectations to cut interest rates Down Under. Increased global confidence (well at least the Euro didn’t collapse last month with the Greek elections) and news that China is trying to re-invigorate its economic growth with a recent interest rate cut (which would mean more demand for Aussie raw materials) has meant the Aussie has surged back against the pound. A good showing in this afternoons US jobs data could see this move test the 1.50 level and I would reiterate my view that anyone waiting for a 1.60 trade could be waiting a long time.
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