The markets continued to digest the moves of the past few sessions yesterday with most FX pairs staying rangebound. It is obvious that the big fish are waiting for announcements from the Bank of England and the European Central Bank.
It is clear that the economic situation has deteriorated in the UK over the past few months, as it has in most developed nations. QE, of course, would represent a big shift in policy direction as it was only 4 months ago that 3 members of the MPC voted for an increase in interest rates. This is an indication of just how turbulent a summer it has been. It is now likely that the MPC will vote for another round of QE here in the UK, but I feel they will wait until they have a better grasp of the inflation picture before doing so. CPI currently sits at 4.4%, over double the bank’s target. I would expect that the minutes of the next BOE meeting (released in a fortnight’s time) will show that a similar number will have voted for an increase in asset purchases this month. I therefore don’t think we’ll see any surprises from the MPC today; only Posen voted for more asset purchases last month and while data has been poor globally I can’t see 4 others switching sides yet.
From the ECB we would like to see a more aggressive approach at Trichet’s last ever policy summit. It is our belief that the decision to raise rates in the Eurozone twice in the past 6 months was the result of a dangerous and obsessive anti-inflation paranoia that has ultimately hurt more Europeans than it has helped. A similar mistake was made in 2008 and a 25bps rate increase was quickly reversed as the Lehman’s situation catapulted world markets into a tailspin. With a banking and liquidity crisis being talked about once again a rate cut is once again needed to protect the European financial system. In any case, at what cost is price stability when the banks are crumbling to the ground? I doubt they will do this however but instead will emphasise that growth risks are to the downside and that inflation is ‘balanced’. I would expect to see euro weaken during the press conference.
While we are talking about QE we saw some hard line thoughts come from a member of the Federal Reserve yesterday. Chicago Fed President Chuck Evans made it fairly clear that he would vote for more asset purchases at the September meeting as it would offer a “measure of protection” against further worsening in the economy.
At around midnight tonight, President Obama will speak on the economy and jobs before Congress. It is suggested that the proposals to promote growth and hiring could cost $200-400bn, but the White House has said the plans “will be paid for” and would not “bust the debt ceiling.” The risk is that the President fails to inspire with a coherent long-term play and instead presents proposals that are solely made for the purpose of next year’s election.
Indicative Rates Sell Buy
GBPEUR 1.1308 1.1336
GBPUSD 1.5924 1.5949
EURUSD 1.4062 1.4082
GBPJPY 123.13 123.40
GBPAUD 1.5031 1.5057
GBPNZD 1.9120 1.9151
GBPCAD 1.5688 1.5717
NZDUSD 0.8316 0.8336
GBPZAR 11.36 11.41
USDZAR 7.1284 7.1601
GBPPLN 4.7580 4.7877
EURJPY 108.73 108.99
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