MPC split on expansion of QE

Currencies Direct August 20th 2009 - 2 minute read

MPC split on expansion of QE

Yesterday morning we had the Bank of England minutes which fed through a vote of 6-3. The market initially perceived the split of 3 to be in favour of a lesser increase than the £50 billion expansion in QE decided. In fact the 3 – King, Besley and Miles wanted an expansion of £75 billion which confirms the things; one is that assumption is the mother of all errors especially when looking at current market conditions and also that the MPC are very very cautious and would rather do more than not enough. This leaves the door open for more Quantitative Easing especially as Mervyn King was petitioning for larger stimulus and paints a pointedly negative slant on the UK economy from the MPC…hence this led to sterling weakness against the USD and EUR.

Economic data from the UK this morning confirmed that UK retail sales came in at +0.4% which was in line/slightly better than forecasts. However the bad news was that public sector net borrowing came in at £8.016 bn way above the forecast of 500 million.

Yesterday following the Bank of England Minutes sterling fell about 0.5% against the USD and EUR. Later in the day we saw a spike following the fall in oil inventories indicating an increase in demand for crude. Oil rose 4% and a surge into commodities ensued with equities in particular Asian equities rallying- this led to GBP/USD moving to 1.6550 from 1.64 and EUR/USD from 1.41 to 1.4250. The move in EUR/USD was a key move after a very quiet week- there are rumours of China buying eur/usd on dips towards 1.40 and supporting the pair above 1.40.

report by Phil McHugh

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