A three way split in the MPC

Currencies Direct October 21st 2010 - 2 minute read

As expected in the release of yesterdays MPC minutes there was a three way split amongst members. Adam Posen showed that he argued for, and also voted for, an increase of GBP50 billion in the amount of QE in the system. This kind of addition would equal a 25% increase in the holding of gilts by the BoE – a sizeable sum. Naturally, the vote for no change outweighed Posen's submission and also Andrew Sentance's regular demand for a withdrawal of liquidity on perceived inflationary pressures. Sterling didn't react too well to the outcome – nothing serious but just looked a little vulnerable. The Budget cut provided little additional information – lots of numbers and political jargon but nothing tangible for markets to react to. The more prevalent remarks came from the Institute of Fiscal Studies within a report released overnight. In it they questioned whether the Government's UK growth projections were overly optimistic and that there was a possibility that the GBP 80 billion – odd of cuts might not prove to be enough. Sterling reacted badly to this forecast, and fell to a 6-month low against the Euro. Overseas investors are going to need verification that the behaviour taken would produce results before they get their assurance in the currency back. This will leave Sterling prone to continued downside pressure in the short term. Today's UK retail sales data is not likely to provide any relief…… For global currencies, and ahead of this weekend's G20 meeting in South Korea, two events have provide this morning's interest. An interview with the US Treasury Secretary, Tim Geithner, reported in today's Wall St Journal proved interesting reading. He emphasised that the US had not embarked upon a policy of devaluing the US Dollar and that the strong dollar was still vital for global stability and recovery and that the major currencies values were roughly in line. He did however divide countries into 3 groups and pointedly entitled the first, which included China, as those whose currencies were "undervalued by any measure". He berated the emerging market countries for not allowing market forces to set currency values (especially China) and stated that they all had a role to play. He added that, "If China knew that if it moved more rapidly, other emerging markets would move with them, it would be easier for them to move." This could all make G20 a bit lively with the US seemingly trying to create a them and us situation with the us being the ‘good guys' and the them being cast as the villains. Today is all about Eurozone PMI data and any indication from G20 attendees of conversation topics or outcomes. Both the greenback and the pound look isolated and vulnerable as we head towards the first week in November during which period, monetary policy decisions in the US, the UK, Japan and Australia will take place.

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