Another volatile trading session yesterday with the euro trading lower against the dollar for the first time this week as we approach month and quarter end.
However, the euro made gains against the pound after it received support as Finland’s parliament approved a key vote to expand the powers of the European Financial Stability Facility (EFSF). However, its progress was checked after reports that German Chancellor Angela Merkel is struggling to obtain enough votes ahead of the vote in the German parliament on the expansion of the EFSF. Germany’s vote is due later on today.
The pound is coming under pressure due to increasing expectations that the Bank of England will unleash a further round of stimulus after Bank of England policymaker David Miles indicated that he is closer to voting for a further round of quantitative easing (QE) in a newspaper interview. Miles told the Times newspaper that the Bank’s Monetary Policy Committee had “substantial ammunition to use if we need to”.
“The case for quantitative easing has become in my mind quite finely balanced, and that wasn’t how I saw things,” he said. “It wasn’t quite as closely balanced a decision two or three months back, before we really got the bad news over the summer.” Miles added that a renewal of QE should focus on gilt purchases, and that the MPC should consider purchases of other assets only if this turned out to have a limited effect.
Despite calls from some quarters of government for more QE, he said that he saw “no political pressure being applied” on the Bank.
Barclays Capital commented that “Further QE seems highly likely to us, and the more pertinent question we see is whether the committee will move in October or November,”.
Miles’ comments come two days after fellow MPC member, Ben Broadbent, seemed to also be coming round to further asset purchases to stimulate the economy. In a speech at Thomson Reuters’ headquarters in London he said the most important indicator for UK monetary policy was that the international environment was “clearly disinflationary”.
The minutes from the September meeting of the MPC showed its members were moving increasingly towards injecting more money into the UK economy.
Only one MPC member, Adam Posen, voted for the Bank to resume assets purchases, but the minutes showed others thought the case for a new stimulus was getting stronger.
“For some members, a continuation of the conditions seen over the past month would probably be sufficient to justify an expansion of the asset purchase program at a subsequent meeting,” the minutes said.
In a further sign of the deteriorating economic outlook, Bloomberg reported in its latest poll of investors global investors are quite pessimistic on the economic outlook. The survey showed that more than a third of those asked believes that the deterioration in the European debt crisis will derail the world economy over the next year. Fully 72% of those surveyed predict that a country will abandon the euro within five years and another 40% anticipate the loss of at least one member in the next 12 months.
The above highlights the pressure European policy makers face as they try to fix the crisis, Bloomberg believes.
Interestingly, almost half of those canvassed think Europe´s pain will spark a world-wide economic meltdown within the next year, well above the 345 who anticipate the same in the United States and Europe.
Sentiment towards Portugal and Ireland has improved and sentiment towards Spain and Italy remains neutral.
