QE speculation increases

Tom Tong08/Sep/2011Currency Updates

GBP

Soft data released yesterday has given more weight to speculation that the BoE will resort to more monetary stimulus.

The Augusts Halifax house price index decreased by 1.2% from its 0.2% increase in July, UK industrial production contracted by 0.2% from June missing expectations of a 0.2% expansion. Manufacturing production on the other hand modestly came in above expectations at 0.1% rather than the expected 0.0% flat reading, annual figures came in at 1.9% as expected. Finally NIESR GBP estimate for August came in at 0.2% after showing a growth estimate of 0.6% for July. These figures underline the economy’s shaky recovery.

Today the MPC is expected to keep interest rates at 0.5% and it is also very likely that the UK asset purchase programme will remain at 200 billion GBP, but a return to QE can not be ruled out, thus any surprises will impact the pound.

EUR

The Euro lives to fight another day with positive news coming out of Italy and Germany.

Germany’s top court rejected a series of lawsuits aimed at derailing Germany’s aid for debt stricken Euro zone countries. This has reassured the markets, and given investors confidence that the Euro zone can finally move forward with addressing its debt problems.

In Italy, Italian Prime Minister Silvio Berlusconi won a confidence vote on austerity measures, indicating that the Italians are making positive moves to curb their ballooning debt.

In other news German Industrial production grew a whopping 4.0% month on month and annually at 10.1%, this was compared to the expected rates of 0.5% and 6.7%. The outlook for industrial production looks very good.

Today we will see the ECB rate announcement and despite speculation that interest rates will decrease this seems unlikely, and a bout of monetary easing is even more unlikely. With Trichet set to leave after the next 2 meetings he is unlikely to rock the boat.

USD

Following the German Courts ruling on the bailouts, risk appetite improved allowing investors and traders to pursue higher yielding assets. Furthermore, the contents of the Fed’s Beige Book were not as bad as expected. The book revealed that 7 out of the 12 FED districts showed a slowdown in growth while 5 showed some growth.

Consumer spending improved in most districts while the FED noted that the labour market is steady, which is in stark contrast to the figures posted in August’s Non Farm Payrolls report.

The Beige book is usually used as the basis of the FED’s monetary policy decision, with things not being too bad QE3 will more than likely be put on the back burner. What the FED have in mind will be revealed today when Ben Bernanke speaks at 4:30pm.

Prior to his speech a set of U.S. economic figures will be released. The trade balance is due out, the deficit narrowed in July, however, a lower than expected figure will indicate that US exports are doing a lot better. Also out today are weekly jobless claims with a figure of 407k expected.

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Written by Tom Tong

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