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Sterling Spikes As BoE Tempers QE - But More To Come?

Last updated 11/5/2009 7:28 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Bank of England kept its overnight rate at 0.5% but made a Solomonic comprise vis a vis its quantitative easing policy by raising the program by an additional 25 Billion pounds versus the 50 Billion pounds expected by many analysts. The  program of asset purchase now totals 200 Billion pounds and the BoE noted that the scale of the program will be “kept under review.”

In assessing the state of the global economy  the MPC  concluded, “The world economy has shown signs of recovery, with a number of emerging market economies experiencing a strong rebound in growth, although global activity as a whole remains significantly depressed.”  Furthermore  its analysis of the domestic economic activity suggested that it was far more focused on growth rather than inflation. The BoE commented, “On balance, the Committee believes that the prospect is for a slow recovery in the level of economic activity, so that a substantial margin of under-utilised resources persists. That will continue to bear down on inflation for some time to come.”

Sterling spiked on the news breaking the 1.6600 barrier against the dollar and 8950 on EURGBP but the mixed message of the BoE may impede further upside progress for now. Although Mr. King and company did not increase the QE program by the full 50 Billion GBP, today’s more modest increase still connotes concern on the part of UK monetary officials regarding the sustainability of the UK recovery.

Most  specifically the continued problems in UK banking sector are likely to force the MPC to maintain an accommodative  monetary stance for the foreseeable future leaving the issue of currency dilution  via additional QE allocations wide open. That in turn could cap any upside in sterling, although for time being the unit is enjoying a relief rally on the more modest moves taken so far  

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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.