Foreign Exchange Report : Bank of England Minutes Reveal Unanimous Vote in Favour of QE, Sending GBP EUR and GBP USD Rates Higher

20 Oct 2011 at 6 AM - Written by John Cameron

STORY LINK Foreign Exchange Report : Bank of England Minutes Reveal Unanimous Vote in Favour of QE, Sending GBP EUR and GBP USD Rates Higher

The Pound Euro exchange rate (GBP EUR) is 1.1471. The Pound Dollar exchange rate (GBP USD) is 1.5719. The Pound Australian Dollar exchange rate (GBP AUD) is 1.5457.

Sterling was the best-performing of the sixteen most-actively traded global currencies during yesterday’s session. This was largely due to the market’s positive reaction to the release of the minutes of October’s Bank of England monetary policy committee meeting.

The minutes showed that, as expected, all nine members had voted for UK interest rates to remain at their current record-low level of 0.5%. What market participants had not been expecting was for the minutes to reveal that the nine-man committee had unanimously voted for a £75bn increase to the Bank’s Quantitative Easing programme.

Investors responded positively to this decisive action, particularly in light of a recent Bank of England study which estimated that the first tranche of £200bn, which the Bank of England pumped into its asset purchase scheme, had added between 1.5% and 2% to the British economy’s annual GDP. Clearly, as far as market participants are concerned, 'more is good' when it comes to QE.

The minutes also alluded to the recent deterioration in the “international outlook”, intensifying market speculation that the Eurozone’s debt crisis is about to enter a dangerous new phase. This led to rumours amongst investors that the unanimous vote in favour of a ramping-up of Britain’s QE programme was designed to provide additional liquidity for UK financial institutions in order to protect their balance sheets in the event of one or more Eurozone states defaulting, or potential contagion caused by a major European retail bank going the way of Lehman Brothers of Bear Stearns.

Elsewhere, the Swiss Franc endured a lacklustre session yesterday. The Franc has been friendless in the market since the Swiss National Bank introduced a price floor of 1.20 on the EUR/CHF rate last month. However, speculation that Switzerland was about to raise this minimum level on EUR/CHF was quashed yesterday when the SNB issued a report stating that a higher level would be near-impossible to maintain due to a lack of sufficient reserves. This may see market participants regain some of their lost appetite for the Franc over the next few sessions.


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