Foreign Exchange: Pound Falls Against The Euro
Published: 20 October 2011
By Julian Stone Leave a Comment
Updated: 20 October 2011
The Pound fell yesterday against the Euro as well as coming under renewed selling pressure against the US Dollar following release of Bank of England minutes which showed that all nine policy makers voted to extend quantitative easing by £75 billion.
This unanimous vote indicates that the program could well be expanded even further if the economic recovery continue to be slow. All members of the committee also voted to keep interest rates on hold at 0.5%.
UK gross domestic product rose just 0.1% in the second quarter and a poor figure is expected for the third quarter, it could even be a contraction in growth.
According to the minutes “heightened awareness of the vulnerabilities associated with the indebtedness of several Euro-area governments and banks had led to a further deterioration in demand prospects. While the worst risk had not crystallized, the threat of them doing so had resulted in severe strains in bank-funding markets.”
Mervyn King said in a speech earlier this week that “for the time being, a significant degree of policy stimulus is appropriate to support demand.”
UK inflation rose to 5.2% in September, more than double the Bank’s 2% target and stands at the highest level since September 2008. The BoE predicts that inflation will fall sharply over the coming year, allowing the MPC to loosen policy further by introducing further stimulus measures if necessary.
There could still be sharp swings in risk sentiment over the next few days, especially given the vulnerability in the UK banking sector, which could impact on the Pound in the foreign exchange markets.
The Euro weakened against the US Dollar and the Yen yesterday, falling for the first time in days, as a French-German split over Europe’s debt crisis solution emerged prior to the meeting in Brussels starting on Friday.
If there’s disagreement over the European Central Bank’s role, an announcement of a proposed resolution may be delayed which in turn could could undermine the Euro.
The Euro initially found support in the region 1.3750 against the Dollar and rallied to a high above 1.3850 before selling off towards the close last night.
In the US, the latest housing starts data was stronger-than-anticipated with a gain to 0.66 million for September and there was a more positive tone following the NAHB index.
The headline consumer price index rose in line with expectations at 0.3%, while the core reading was slightly lower than expectations at 0.1%. The net impact was to lessen recession fears to a degree, although the tone remained very cautious.
The Euro failed to hold the 1.38 level and dipped sharply last night ahead of the EU summit meeting.
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