Pound To US Dollar Exchange Rate Gains As Investors Price-In Further QE For The US

Modified: Wednesday, 28 March 2012 08:31 BST - Written by David Woodsmith

STORY LINK Pound To US Dollar Exchange Rate Gains As Investors Price-In Further QE For The US

The most eye-catching development of yesterday’s session in the currency markets saw this week’s move against the US Dollar continue, taking the GBP USD exchange rate through the key psychological level of 1.6000 for the first time since 14th November last year.

The concerted move out of US Dollar denominated assets was instigated by Monday night’s speech from Federal Reserve Chairman Ben Bernanke, in which he suggested that a further loosening of American monetary policy, in the form of more Quantitative Easing, was likely for later in 2012. This was music to the ears of the investment community, as it has been generally asserted by equities analysts that the flood of ‘easy money’ which the world’s central banks, and in particular, the Federal Reserve, have made available since the advent of the credit crisis in 2007, has largely been used to prop-up global share indices.

Yesterday afternoon’s session brought the release of more economic data which suggested that the real US economy remains in a far from healthy condition. The closely-watched Case-Shiller Home Price Index for January showed at a disappointing 135.46, down from December’s 136.61 print. Commentators had been an anticipating a rise in the level of the index, so this result was especially disappointing. The credit crunch started with problems in America’s housing market, and five years on, it would appear that this key sector of the world’s largest economy remains under the weather.

Elsewhere, yesterday proved another difficult day for the euro, as Spanish policy-makers confirmed that their economy had double-dipped back into recession. Sentiment towards the single currency was further eroded by comments from Angelo Gurria, the Head of the Organisation for Economic Co-operation and Development, suggesting that the eurozone needs to bolster its bail-out fund to €1bn in order for it to have sufficient ‘firepower’ to tackle the region’s ongoing debt crisis. Reports suggest that German Chancellor Angela Merkel believes that an increase to €700bn will suffice. This divergence of opinion could hold back the single currency ahead of Friday’s eurogroup debt summit.

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