Sterling Sinks as BOE Increases QE - Fakeout?

Last updated 5/7/2009 7:29 AM ET (GMT -5) 0 Comments - Add your comment

Boris Schlossberg

Director of Currency Research, GFT

The BoE kept rates on hold at 50bp as expected, but surprised the currency market by announcing that it may buy an additional 50 Billion GBP worth of assets as part of its ongoing quantitative easing program increasing the total amount to 125 Billion GBP.

In a post announcement statement, the UK central bank noted that, “The world economy remains in deep recession. Output has continued to contract and international trade has fallen precipitously. “ However, it also recognized that “in the opposite direction, there is considerable economic stimulus stemming from the easing in monetary and fiscal policy, at home and abroad, the substantial depreciation in sterling, past falls in commodity prices, and actions by authorities internationally to improve the availability of credit. That stimulus should in due course lead to a recovery in economic growth.” Nevertheless, the BoE concluded that, “the timing and strength of that recovery is highly uncertain.”

Bank of England Ups Quantitative Easing Program

Overall BoE issued a relatively downcast assessment of the current economic conditions and the market immediately reacted by shaving more than 100 points off sterling. The news that UK monetary authorities will continue to expand the quantitative easing program may weigh on the pound in the near term, but the amount of additional purchases is small relative to the country’s GDP and is unlikely to have much dilutive impact over the long term. Although there was an instant knee jerk reaction to the downside in cable, UK fundamentals appear far stronger today than they were during last month’s BoE announcement and therefore the unit may find some support at the 1.5000 level from longer term investors and could even recover most of it losses if risk appetite proves supportive for the rest of the day.

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.