All Trade Ideas and trading scenarios found on FX360.com are hypothetical. FX360.com has not placed these Ideas in a live trading environment. Forex Trading involves high risks, with the potential for substantial losses that exceed your initial deposit and is not suitable for all persons. Past performance is not necessarily indicative of futures results.

BoE Votes Unanimously For Quantitative Easing

Last updated 2/18/2009 6:22 AM ET (GMT -5) 0 Comments - Add your comment

• Share this:

Boris Schlossberg

Director of Currency Research, GFT

The minutes of the Monetary Policy Committee meeting revealed that the Bank of England voted unanimously to support quantitative easing as  authorities attempt to employ every policy tool at their disposal to stimulate the moribund UK economy. The MPC also voted 8-1 to lower rates by 50bp with David Blanchflower once again reaffirming his dovish stance by opting for a 100bp cut.

The move towards quantitative easing   is a clear signal that the BoE is running out of room with respect to standard monetary policy protocol as UK rates inch ever closer to the zero percent level. With interest rates levels at record lows, further cuts are unlikely to have much stimulative impact, forcing Mr. King and company to resort to quantitative easing as a way to infuse liquidity and credit into the market.

The danger of course is that this policy choice could ultimately spark inflation, as BoE floods the financial system with billions of pounds.  Yesterday’s higher than expected CPI readings are certainly a cause for concern, suggesting that despite the sharp drop off in demand price pressures continue to swirl through the UK economic system, exacerbated by the sharp depreciation of the sterling in the past 12 months.

Nevertheless ,  MPC members have clearly decided to err on the side of easing as UK economic woes have sent the country into its worst recession since the 1970’s.  Should their gamble pay off , UK may be the first of the G7 economies to rebound from the global slowdown - a  move that would help rally cable and mitigate some of the price pressure effects.

Sterling sold hard ahead of the news dropping nearly 200 points as traders anticipated the Bank’s policy shift. The unit may remain under pressure for rest of the day as the market  digests the news, but 1.4000 appear to  be relatively strong support that’s likely to elicit some bargain hunting and we doubt that the pair will drift much below that barrier today.

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,  cable 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.

The information, including Commentary and Trade Ideas, provided on FX360.com should not be relied upon as a substitute for extensive independent research which should be performed before making your investment decisions. Global Forex Trading and FX360 .com is merely providing this information for your general information. The information and opinions presented do not take into account any particular individual’s investment objectives, financial situation, or needs. All investors should obtain advice based on their unique situation before making any investment decision and should tailor the trade size and leverage of their trading to their personal risk appetite. Any projections or views of the market provided by FX360.com may not prove to be accurate.

The views of the authors and analysts are not necessarily those of Global Forex Trading, its owners, officers, agents or other employees. FX360.com and the currency research team will not be responsible for any losses incurred on investments made by readers and clients as a result of any information contained on FX360.com. Global Forex Trading and the currency research team do not render investment, legal, accounting, tax, or other professional advice. If investment, legal, tax, or other expert assistance is required, the services of a competent professional should be sought.

Loading...

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.