Sterling rallies on diminished chance of QE as IMF state euro teetering on the brink

Tom Tong19/Apr/2012Currency Updates

GBP

Sterling was boosted in after an increase in hawkishness of the Bank of England. The pound rose 0.7% against the euro, hitting a 19-month high. It also rose 1.1% against the yen and 0.6% against the dollar. Earlier in the day, sterling had dropped off in the lead up to the release of the minutes from the Bank of England’s last policy meeting as most market participants had expected a repeat of previous dovish sentiment. However, the minutes revealed a decrease in the chances of further quantitative easing measures being applied in May when the current round of asset purchases come to an end.

The usually dovish Adam Posen dropped his previous vote in favour of an increase in asset purchases, with the vote changing from 7-2 last month to 8-1 this month in favour of no further stimulus measures. This leaves Davis Miles as the only member of the Monetary Policy Committee still in favour for an immediate increase of £25bn. This was probably down to the MPC seeing a greater chance of persistently high inflation, backed up by sticker than expected consumer price data released yesterday; although this had not informed the MPC’s decision but added weight to that view.

Sterling saw further gains on the back of positive UK jobs data released yesterday furthermore. Unemployment fell unexpectedly to 8.3% from 8.4%, a fall by 35,000.

EUR

Mounting worries ahead of Spain’s debt sale on Thursday pressured the euro on Wednesday as the euro zone’s fourth largest economy struggles to deal with its financial situation. Spain will auction up to €2.5bn of 2014 and 2022 bonds and markets will be keeping a close eye on rising yields and whether demand is strong. There is concern that poor demand will rattle already fragile sentiment towards Spain’s financial position.

The IMF have stated that the crisis-hit euro is teetering on the brink of collapse. In a significant vote of no-confidence, Tuesday’s report from the global financial organisation admitted the troubled European single currency had flaws and was at risk of a disorderly default and exit by a euro area member, amongst these renewed fears are that Spain could soon follow Greece, Portugal and Ireland in accepting a multi-billion pound international bail-out, which could have an adverse effect on the Spanish bond yields at Thursday’s auction.

USD

There are two things that the dollar truly benefits from: fear, and volatility, in the broader financial markets. The impetus on both accounts was rather weak this past trading session; therefore, the dollar’s activity was unsurprisingly muted. The benchmark S&P 500 was little moved Wednesday after the previous session’s impressive rally – the second largest this year.

U.S. stocks lost ground on Wednesday, slumping a day after the S&P 500’s best day in a month. The Dow Jones Industrial Average fell 82.79 points, or 0.6%, to 13,032.75. The Nasdaq Composite slid 11.37 points, or 0.4% too. As a result the greenback benefited from weakness in U.S. stocks, gaining ground against most of its major currency rivals, except sterling.

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Written by Tom Tong

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