The pound collapsed on Friday as markets were rattled by the contents of UK Chancellor Kwasi Kwarteng’s mini-budget.
Will they or wont they?
That is will the Bank Of England extend the current measures in place for Quantitative Easing? It will be a mighty close call and will be a defining juncture for the UK’s monetary policy sentiment. On the one hand the economy is still fragile objectively and lending certainly has improved- in July the measure of money supply fell by the most this year and lending to companies has fallen for three months in a row. On the other economic data in the last week could sway a decision to hold and adopt a wait and see approach- the problem with this is that if they hold now and start again later then it will not look very good. QE already introduced will not have had much effect in the markets as it will take time to filter through. For the currency markets the repercussions should be very clear- an increase in QE will lead to selling pressure in sterling and no change could push us beyond 1.70 against the USD and 1.18 against the EUR.
We also have the European Central Bank (ECB) decision today and no change is expected in the rate of 1%. However will the ECB adopt more QE measures themselves? Personally I doubt it. The IMF recently stated that the ECB should look to cut further, however I would expect a stoic disregard of their view from the ECB. The ECB may offer clues to future monetary policy strategies and again this could play into the relative strength of the euro.
Yesterday we saw lots of positive data snaps from the UK economy with Halifax House prices, PMI services, Industrial output, manufacturing output all better than forecast. Sterling tried to push higher and did break above 1.70 but could not hold ahead of today’s announcement.
report by Phil McHugh
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