CONTINUING THE DOVISH BOE TREND
UK BRANCH MANAGER, EASY-FOREX
DESPITE signs of improvement for the UK economy, the pound traded at the month’s low versus the US dollar and a 10-week low versus the euro last week. A weaker pound was initially triggered after the release of the minutes for the Bank of England’s (BoE) February policy meeting. The minutes show that two of the nine policymakers wanted a £75bn increase in quantitative easing (QE) instead of the £50bn supported by the other seven. Despite the increase in QE being widely anticipated, the market was surprised that two of the policy makers voted for a higher figure. This was priced in and spurred a round of sterling selling.
In the following days the pound then received another blow when UK GDP revealed that the economy had contracted by 0.2 per cent in the last three months of 2011. The negative data along with a string of dovish statements from the BOE policymakers began to raise questions about the state of the UK economy and the next BoE move.
After the release of the fourth quarter GDP figure, BoE Governor King said that the recovery of the UK economy is slow and uncertain. Fisher echoed King’s sentiment and said that the outlook for the economy is still incredibly uncertain and he was keeping an open mind on whether more quantitative easing would be needed. The dovish comments continued with voting member Bean saying that although he expects a modest pickup in the economy there are continuing headwinds from unwinding of excessive debt and the government’s fiscal consolidation. Meanwhile Miles, who voted for a larger asset purchase in February, said the UK hasn’t seen much of a recovery from one of the deepest recessions in the history of the country. The MPC is likely to wait until May before deciding on further easing.
The February minutes, poor GDP data and the increased probability of more QE suggest that sterling will trade with a negative bias in the near-term. However, in the bigger picture the main drivers for the pound are risk appetite and the EU debt crisis. This means in the longer term the pound’s downside should be limited if the equity rally and market risk appetite continues which will largely depend on news from the EU.
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