The pound fell against the euro for the first time in six days ahead of the announcement from the Bank of England (BoE) at lunchtime today. The BoE is expected to maintain interest rates at the all time low of 0.5%, a level at which it has stood for 29 months, but analysts will be keeping a close eye on whether it will signal an increase in the Quantitative Easing (QE) budget to stimulate the UK economy from its morass.
The BoE has resisted changing interest rates from 0.5% and its QE budget from £200 billion since March 2009. However, the UK economy remains terribly weak. UK GDP expanding by just 0.2% in the second quarter leading to calls for the QE budget to be extended by at least £50 billion to help stimulate the economy.
Economists at Bank of America Merrill Lynch think that while an interest rate rise is not expected in the near future, the chance of further QE in the next few months has increased. In its Global Economic Weekly report, analyst Nick Bate said the monetary policy outlook had changed markedly over the last few months.
Philip Shaw, an economist from Investec, said: “Further QE is possible over the coming months, but the high prevailing rates of inflation are likely to dissuade members from sanctioning further asset purchases unless there are signs that the UK is re-entering a lasting downturn.”
In a further sign of the difficulties facing the UK economy, the Halifax reported that UK house prices fell by 1.2% in August compared with the previous month. The drop in August was the first fall since April and came off the back of three successive monthly rises according to the lender’s data.
The US dollar also fell on Wednesday ahead of President Barack Obama’s jobs plan announcement. Obama is expected to outline a jobs package worth an estimated $300 billion. The plan is expected to include an extension of tax relief and an infrastructure plan focusing on schools. Aid for the unemployed and financially struggling states are also expected to be in the plan.
Hopes that the strategy will spur jobs growth soothed nervous markets.
In a rare spot of good news for the ongoing euro zone sovereign debt crisis, the German constitutional court upheld the first Greek bailout package. Italy’s senate also approved an austerity package.
The European Central Bank (ECB) also meets today for its monthly rate setting meeting but is widely expected to keep euro zone interest rates unchanged at 1.5%. However, some analysts are suggesting that any softening in the anti-inflation tone in his monthly speech by Jean-Claude Trichet, the ECB President this afternoon could signal a cut in euro zone interest rates later on this year to help stimulate the euro zone economies and bring relief to the highly indebted euro zone periphery.
Commentary by Tony Redondo
“Any opinions expressed in this document are those of TorFX analysts. Any analysis and/or forecasts provided are aimed at helping clients understand market conditions and developing trends. Clients are wholly responsible for their own trading decisions.”
