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Sterling improves after BoE quantitative easing decision
Publication date: 8 June 2012
Author: Richard Driver, CaxtonFX
It was a much better day for sterling yesterday as the Bank of England decided not to introduce further quantitative easing. In addition, the UK services sector growth figure came in above expectations, so sterling was able to recoup some of its lost ground.
Today’s session is a slightly quieter day in terms of key data releases. With Fitch downgrading Spain last night, eurozone fears are likely to dominate thinking.
STERLING/EURO: Sterling enjoyed a decent nudge higher as the MPC held fire on quantitative easing.
• Amid increasingly weak UK growth data (such as last week’s poor manufacturing figure), suspicions had been increasing that the MPC would decide to introduce further QE. This did not turn out to be the case, helped by a stronger UK services figure, and sterling enjoyed a relief rally. It will be very interesting to see just how close a call it was when the voting pattern is revealed by the MPC minutes in a fortnight.
• Whilst Thursday’s Spanish bond auction went relatively smoothly, concerns were ramped up again last night as Fitch downgraded Spain’s credit rating by three notches. This pair is now trading at €1.2375 and we continue to look for higher levels.
STERLING/US DOLLAR: Bernanke provided no hints of QE3 and the dollar responded positively.
• Sterling made a strong start to Thursday thanks to a solid UK services figure and the BoE’s ‘no QE’ call. However, sterling’s gains were given back as Bernanke disappointed those hoping that he would provide some hints as to QE3. The US Federal Reserve Chairman indicated that risks to the US economy will have to intensify further for QE3 to become necessary.
• This pair is trading down towards $1.54 this morning and we expect equities will lose come off a little today, which should play in to the hands of the greenback.
EURO/US DOLLAR: The euro was rejected at the $1.26 level despite some encouraging comments from Merkel.
• Merkel initially helped the euro yesterday by stating that the EU was ready to do what was necessary to prop up the euro. Encouraging words, but there remains a distinct shortage of action from the EU’s leaders. A lack of clues as to QE3 from Bernanke helped the dollar bounce back yesterday.
• This pair is trading below $1.25 this morning and we may see risk appetite tail off a little as we approach the weekend.
STERLING/AUSTRALIAN DOLLAR: Sterling finally enjoyed a bounce against the aussie dollar as Asian equities gave back some of this week’s gains.
• There was some further positive Australian economic data last night in the form of a much narrower trade deficit than expected. China also cut its interest rate in a bid to support its declining growth. However, the AUD and other risk assets have not rallied as you might expect. There may be concerns that Chinese growth is deteriorating worse than initially thought.
• Sterling is trading up towards 1.57 this morning and with risk appetite making a fairly weak start to today’s session, sterling may finish the week on a firmer note.
STERLING/NEW ZEALAND DOLLAR: Sterling is trading a little higher against the kiwi dollar this morning as Fed disappoints and Chinese data looms.
• The lack of QE3 indications from Fed Chairman Bernanke took the shine off the NZD’s performance yesterday. There are also plenty of nerves surrounding Chinese economic data to be released over the weekend, which is dampening some of the enthusiasm surrounding the Chinese rate cut.
• Sterling is trading at 2.02 this morning and risks look skewed to the upside amid declining risk appetite.
STERLING/CANADIAN DOLLAR: Whilst Canadian economic data was impressive, sterling found support at the 1.59 level.
• A gauge of Canadian growth came in impressively above expectations yesterday, bouncing back from a softer figure in May. Nonetheless, this pair edged higher as sentiment improved towards the pound and expectations of QE3 from the Fed were contained by Bernanke.
• Today’s session brings some important Canadian employment and trade balance data but as ever global risk sentiment trends will probably trump these releases. This pair trades above 1.5950 this morning.
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