The currency blog

Foreign exchange specialists

BoE leave QE measures unchanged

The Bank of England surprised the markets by keeping the Quantitative Easing programme at £125 billion, as expected interest rates were kept at 0.5%. This was a big shock to the markets which had sold sterling in the run up to the announcement with the expectation that a further £25 billion would be injected. For sterling we saw a knee jerk reaction to the news- moving higher against the USD and the euro. This puts sterling back into its comfort zone against the USD and euro and we should hold the 1.15-1.185 and 1.62-1.66 range in the short term. The move in sterling was not wholly significant due to the door being left open for a review on QE in the August BoE meeting; in addition recent weak economic data for the UK in the form of Industrial output and GDP is still weighing on the pound.

The pound is also up against the euro this morning, helped by the QE news but also due to increasing worries over Eastern Europe; reports are that the IMF are discussing aid programmes with at least 10 Eastern European governments. GBP/EUR now approaching 1.17 and EUR/USD has retraced from 1.4025 to 1.3915 currently. Yesterday the German finance minister also stated that Germany’s regional state banks are the “biggest systemic risk” to the nations’ financial sector. We have touched upon these concerns previously and so far the euro has been relatively unscathed, but this cannot last forever and heighten concerns and added stimulus in this area should weigh heavily on the euro going forward.

US equities rose slightly yesterday as weekly jobless claims fell 52,000 to 565,000 and in addition Alcoa Inc kicked off the earnings season with better than expected numbers. This leaves the markets in a confused state as traders do not know which way to turn between recovery, risk aversion, buy USD or sell USD. This is hardy surprising given the mixed economic data materializing globally. In the currency markets the confusion and volatility is very clear, this week the main theme has been the sell of commodity driven currencies with AUD, NZD and ZAR all lower and the YEN is the main gainer.
The Washington post has reported that AIG is preparing to pay millions of dollars in bonuses to top executives, this following an earlier round of bonuses four months ago…got an inkling this is not going to sit well with public opinion…