Pound Drops on Shift to QE- Will 1.4000 Hold?

Last updated 2/18/2009 6:20 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

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Overnight Eco

• AUD MI Leading Index -0.4% vs-0.6% last
• AUD Quarterly Retail Sales 0.8% against 1.0% expected
• GBP MPC Meeting Minutes 9-0 for Quant easing
• GBP CBI Industrial Order Expectations -56 vs. -45

Event Risk on Tap

• CAD Wholesale Sales expected at -1.5%
• USD Building Permits expected at 0.53M
• USD Housing Starts expected at 0.53M
• USD Import Prices expected at -1.4%
• USD Capacity Utilization Rate expected at 72.6%
• USD Industrial Production expected at -1.3%

Price Action

• USD/JPY bid through 9250 on better equity trade in Europe
• AUD/USD runs back to 6400 on short covering be retrest off highs
• GBP/USD pushed to 1.4100 on quantitative easing news
• EUR/USD rangebound below 1.2600 driven mainly by EUR/GBP flows

On a night when the rest of the G10 currencies consolidated their losses in listless, event free trading, cable was the main source of action dropping 200 points from its highs on news that Bank of England voted unanimously for quantitative easing. The BOE voted 9-0 to expand its monetary policy initiatives beyond rate cutting and 8-1 to lower rates by 50bp with Blachflower once again calling for 100bp cut.

In a released statement the MPC noted, ”To the extent that further cuts in bank rate could not inject sufficient stimulus, the committee would need to use alternative policy measures. Therefore the committee unanimously agree that the governor should write on its behalf to the chancellor to seek authority to conduct purchases of government and other securities, financed by the creation of central bank money.''

Over the long run, the primary bet between pound bulls and bears remains one of growth versus devaluation. If BoE’s move towards quantitative easing is able to stabilize the UK economy and revive its stagnant services sector, cable will bounce irrespective of further expansion of the central bank’s balance sheet. If however, demand remains dormant while CPI continues to hover near the 3% annual level, sterling will no doubt see more selling pressure as traders will view tonight’s announcement as nothing more than an exercise in dilution and devaluation. That’s why most FX market participants will pay very careful attention to UK micro economic data in the next several months watching for any signs of improvement. Today’s release of CBI Industrial trends which printed at -56 versus -45 eyed was hardly a boost of confidence in future growth.

Meanwhile the EUR/USD range traded most of the night as traders continue to grapple with the issue of exposure of the region’s banks to Eastern European debt. The pair appears to have found temporary support at the 1.2500 level, but remains extremely vulnerable to further probes to the downside. A break of 1.2500 is likely to trigger a cascade of stops and it will interesting to see if the pair tests that level during the North American session.

FX Upcoming

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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.