Sterling gains continue as Bernanke distances himself from QE3

Tom Tong18/Jul/2012Currency Updates

GBP

Yesterday saw continued gains for sterling as it managed to reach a three and a half year high versus the euro, and German bond prices extended last week’s gains as many investors are worried the European Central Bank has changed its stance on how some bondholders could be treated under Spain’s bank bailout.

The pound did however lose ground versus the US dollar early on Tuesday as data showed UK consumer price inflation fell to 2.4 percent in June, its lowest since November 2009, and undershooting forecasts for a reading of 2.8 percent. The poor CPI data along with the US Federal Reserve Chairman Ben Bernanke giving no firm hints that the central bank would opt for another bout of quantitative easing meant the pound fell 0.4% versus the Greenback.

Many analysts said that these falling prices in the UK have justified the BoE’s asset purchases, intended to stimulate poor economic growth, and said the 375 billion pounds programme could be expanded further if necessary. Falling inflation also leaves room for manoeuvre by the BoE for further monetary easing.

EUR

The euro ended the trading session by recovering from losses against the dollar late on Tuesday as traders awaited another day of testimony from Federal Reserve Chairman Ben Bernanke. Despite initially strengthening, the dollar managed to erase its early gain versus the common currency as investor risk appetite increased after Benanke outlined possible options for adding further monetary stimulus.

The euro fell to its lowest levels versus the pound since 2008 and was largely hurt by comments from Italian Prime Minister Mario Monti, who said he expected the governor of Sicily to resign given a growing financial crisis that has pushed the independently governed region close to default.

In other news it has been announced that the centerpiece of Europe’s latest effort to stabilize the euro currency union is now in the hands of a panel of German judges. The German Federal Constitutional Court is not expected to issue a ruling on the legality of the European Stability Mechanism until mid-September. This means that some of the key areas of the rescue plan suggested by the European Union leaders earlier in the month will be on hold in the meantime.

The ESM is a permanent bailout fund that will have a maximum lending capacity of €500 billion. It is designed to replace the European Financial Stability Facility, which has backed bailouts for Greece, Portugal and Ireland.

USD

On Tuesday, Fed Chairman Ben Bernanke’s prepared testimony on the economy and monetary policy provided no new indication that the Federal Reserve is any closer to pulling the trigger on QE3. This sent the U.S. dollar soaring against all the major currencies because it means that while September is still in play, raising asset purchases in August is completely off the table.

Sterling fell against the dollar after data showed UK annual inflation fell more than expected in June, giving the Bank of England more room to take further monetary action. Against the yen, the dollar managed to recover from a one-month low earlier in the session. Analysts said expectations of intervention by the Bank of Japan kept potential yen buyers at bay.

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Written by Tom Tong

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