Market awaits Trichet's stance on QE

Tom Tong19/Oct/2010Currency Updates

GBP

Sterling lost ground yesterday as caution prevailed ahead of the BOE minutes and comprehensive spending review on Wednesday. Sterling initially gained on news that property website Rightmove showed asking prices in England and Wales had risen for the first time in four months during October. However, this momentum was stopped by a rebounding dollar as analysts said the pound remained vulnerable ahead of the release of the UK government’s spending review on Wednesday, which is set to deliver the biggest public cuts in decades. There was renewed speculation that the Bank of England would opt for more quantitative easing to offset the adverse impact of fiscal tightening. Additionally, the BoE meeting minutes, also due on Wednesday, are expected to be fairly dovish with policymaker Adam Posen voting for more QE, also putting sterling under pressure.

USD

The dollar gained yesterday as US Treasury Secretary Timothy Geithner vowed that the United States would not devalue their currency and further QE was priced in. Geithner vowed the US would ensure a ‘strong dollar policy’ and not let the currency devalue for export advantage. Many emerging market countries are complaining that Fed money creation is weakening the dollar, and causing more funds to flow into their markets, pushing up their currencies. Traders have now priced in the prospect of further quantitative easing after Bernanke’s speech on Friday and the only variable that could affect it further is surprises in the size of the additional stimulus. The dollar also received a lift as the US Treasury delayed its currency report, in which it might name China as a currency manipulator, until after the G20 meeting of central bankers and finance ministers next month.

EUR

The euro lost out yesterday as it failed to stay above key support levels and speculators moved back into the dollar. The markets are also looking to Trichet’s speech at midday in order to gauge Europe’s stance on further QE. European Governments took landmark steps yesterday to make it easier to sanction states that blow their budgets and create a permanent, Greek-style safety net for those who cannot cope. After eight hours of negotiations in Luxembourg, seeking to deliver on promises to ensure the Greek debt crisis would never happen again, European Union president Herman Van Rompuy was also charged with negotiating treaty change for the bloc “by 2013.” For now it seems Europe has moved on from the tequila crisis that blighted it through the summer with Quantitative easing austerity now the market moving themes.

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Written by Tom Tong

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