Foreign Exchange: Bank of England Gives Pound A Boost

Published: 8 October 2010 By Diane Ray Leave a Comment

The Pound received a boost yesterday as the Bank of England left interest rates on hold and decided against further quantitative easing.

Foreign ExchangeThe Bank of England MPC held interest rates on hold at a record low of 0.5% and left the emergency stimulus unchanged at £200 billion.

Clearly despite the vocal comments from Adam Posen for further stimulus, and Andrew Sentance for an interest rate increase, neither party managed to convince their colleagues for a majority as the committee held firm.

There is a preference to wait for new economic forecasts. By next month, the BoE for example will have more details on the extent of the public spending cuts, due on October 20th, and the US Federal Reserve’s plans to add more stimulus.

After the decision, the Pound rallied from a five-month low against the Euro and breached $1.60.

This recovery in Sterling though didn’t last long, after a report from Halifax showed that UK house prices fell by the most on record in September.

A report from the National Institute of Economic and Social Research was released yesterday afternoon and showed that the pace of UK growth dropped by more than half in the third quarter. Gross domestic product increased just 0.5% in the three months through September, compared with a 1.2% gain in the second quarter.

EUR/USD

The Euro tested resistance levels above $1.3950 against the US Dollar on Thursday and pushed to a high just above the $1.40 for the first time in eight months.

This strenghtening followed European economic data being better than expected, with an increase in German industrial production. The European Central Bank left interest rates on hold at 1% and Trichet’s comments were broadly in line with market expectations.

Trichet also commented that he opposed disorderly currency moves and this will increase speculation that the G-7 will look to stabilise currency markets.

The Euro sank bank towards $1.3850 on the back of profit taking in the foreign exchange market.

The US economic data was slightly better than estimates, with a fall in the weekly jobless claims to 455,000. This will boost optimism that there will be an increase in private-sector payrolls this afternoon, but underlying confidence in the US economy is fragile with expectations of further Fed easing.

Market Analysis by Adam Solomon, Torfx

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Any opinions expressed in this document are aimed at helping readers understand foreign exchange market conditions and developing trends. Readers are wholly responsible for their own trading decisions.

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