By Claire West
Having been under pressure for most of this morning’s session, sterling has sprung higher following the Bank of England’s decision to leave the quantitative easing budget on hold.
There had been a rising tide of speculative bets recently that the Bank of England would follow the lead of the US and restart its asset purchase facility. However, given the comparatively strong run of UK figures recently, including third quarter economic growth of 0.8%, the threat of an American style QEII has subsided. Confirmation of the Bank’s decision has given sterling a nudge higher, reclaiming the €1.14 level and pushing a nine-month high against a broadly weaker US dollar.
“It shouldn’t have come as too much of a surprise that the Bank opted against an extension of QE, but the outside possibility of a move had forced sterling lower. Although encouraging figures from UK of late are unlikely to deter the threat of QE entirely, the balance does appear to be swinging back in favour of the hawkish members of the MPC,” says Duncan Higgins, analyst at Caxton FX.
It will be two weeks before the minutes of the BoE’s meeting are released but another three-way split in the vote looks like the most probable outcome. Both Adam Posen and Andrew Sentance have reiterated their respective views to extend QE and raise interest rates, but it remains unlikely that either will have found support this time around.
Higgins continues, “The risks between weak economic growth and rising inflation are still finely balanced and it will be some time yet before the Bank can justifiably rule out another round of monetary stimulus.”
That sterling jumped half a cent following the Bank’s announcement is testament to the weight that QE places on the pound. But with that threat now lifted, at least in the short term, we see the pound steadily retracing its losses against the euro.” Higgins adds.
Sterling has also jumped against the US dollar where the Fed’s decision yesterday evening has encouraged further dollar selling. The price is now up at its strongest level since late January, hovering around $1.6250 with potential to move higher in the near term.