Foreign Exchange Insight : Sterling Comes Under Pressure as Bank of England Votes to Ramp Up Quantitative Easing Scheme by ?75bn, While GBP USD Could Drop if Non-Farm Payrolls Disappoint

Published: Friday, 7 October 2011 08:53 BST - Written by John Cameron

STORY LINK Foreign Exchange Insight : Sterling Comes Under Pressure as Bank of England Votes to Ramp Up Quantitative Easing Scheme by ?75bn, While GBP USD Could Drop if Non-Farm Payrolls Disappoint

The Pound Euro exchange rate (GBP EUR) is 1.1552. The Pound Dollar exchange rate (GBP USD) is 1.5538. The Pound Australian Dollar exchange rate (GBP AUD) is 1.5844.

Yesterday was a tale of two central bank policy decisions in the currency markets, with both the Bank of England and the European Central bank making their monthly announcements.It was the Bank of England’s decision to increase its Quantitative Easing programme from the existing £200bn allocation to £275bn which stole the headlines, bringing instant selling pressure on the Pound.

Until this month’s meeting, Bank of England MPC member Adam Posen was a lone voice in calling for an extension to Britain’s asset purchase scheme – he had consistently voted for a £50bn increase in recent months. The fact that at least another four members have changed their minds since the last meeting and voted for an increase was a surprise to the markets and the fact that the committee voted for a £75bn increase, rather than the £50bn that Posen had been calling for, shows the depth of concern that the MPC feels regarding the future prospects of the UK economy.

These fears were re-iterated by Bank of England Governor Mervyn King, who attempted to justify the ramping up of QE in a television interview following the decision by stating that, "this is the most serious financial crisis we've seen at least since the 1930s, if not ever."

The European Central Bank’s policy decision, which followed 45 minutes after the Bank of England’s, proved to be less dramatic with ECB policy-makers opting to maintain the Eurozone’s key lending rate at 1.5%. There was some relief from investors holding Euro-denominated assets that the committee had avoided the temptation to cut interest rates, following ECB President Jean-Claude Trichet’s uncharacteristically dovish comments following September’s ECB decision.

In his final post-policy decision press conference before he hands over the mantle of ECB President to the current head of the Bank of Italy, Mario Draghi, Trichet did issue a warning on the need to be watchful of European price rises. However, the focus of his comments was once again on the potential downside for growth, warning that Eurozone economic activity will be ‘very moderate’ in the second half of 2011 due to ‘high uncertainty’ regarding sovereign debts and the European banking sector.

With worries over Greece and Italy’s debts still lingering and the downbeat comments coming from central bankers in recent weeks, this afternoon’s US Non-Farm Payrolls data for September takes on added significance. If the figure prints at below the expected 50,000 figure, then a renewed flight to safety is likely, taking the GBP USD rate lower and causing selling pressure on the AUD, NZD and ZAR.


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