BOE dovish tones cause sterling sell off

Tom Tong23/Feb/2012Currency Updates

GBP

Yesterday saw a significant decrease in the pounds value both against the Dollar and Euro. These movements can be largely attributed to the Bank of England minutes unexpectedly showing that two of its policy makers voted for an even bigger increase in quantitative easing than the bank had implemented earlier this month.

With the positive inflation report earlier in February predicting that the UK econonmy would imporve it was highly unexpected that further stimulas would be needed. This however has may not be the case with both the BoE’s David Miles and Adam Posen having voted to pump an extra 75 billion pounds into the economy instead of 50 billion, which will increasing the possibility that the central bank will opt for more easing later in the year.

These surprisingly dovish minutes propelled the pound to weaken drastically both against its European and American counterparts, resulting in Sterling hitting its lowest point against the Euro in 2012 and the Dollar in a week.

EUR

Recently there has been more uplifting news coming out of the Eurozone in relation to the Greek bailout fund may turn out to be short lived. On Wednesday it was announced that the credit rating agency Fitch had decided to lower the ever struggling countries credit rating to C from CCC which is just one noch from the bottom rating of D and gave the warning that a default is ‘highly likely in the near term’.

Many of the Euros gains of late could be limited as many hurdles are still to be cleared before finally completely agreeing a second Greek bailout package. These continued worries were yesterday strongly reflected in other markets.

Following the immediate gold rally to a two-week high on Tuesday after Europe finally announced they had struck a rescue package for Greece, it was apparent that there were still deep doubts held by many about the country’s inability to avoid a default in the long run which would likely drag gold lower with other assets, this in turn prompted investors to take profits.

USD

The Dollar had a very successful day of trading yesterday and we saw it make gains against all other major currencies. The Greenback managed to reach a seven month highversus the Japanese Yen, the dollar’s been benefiting recently against the yen as U.S. yields rise, which analysts say has been a bigger factor than actual intervention by Japanese authorities or comments about the currency’s strength.

Following the announcment that further QE could be on the horizon for the UK and a reading showing weaker than expected activity from the Eurozone and China meant the Dollar also enjoyed significant gains against the pound and the common currency on Wednesday.

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Written by Tom Tong

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