Bank of England unanimous in need for further QE

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Sterling moved higher versus its crosses yesterday despite the dovish tone of the Bank of England minutes and the unanimous vote for further quantitative easing by £75bn. There was nothing in the minutes that we didn’t know already but they do once again emphasise how scared the Bank of England is of the European crisis getting further out of control. With inflation pushing over 5% at the moment they have still decided, unanimously, to increase asset purchases. It seems that the MPC are taking a more proactive stance to the problems of liquidity and sovereign debt than a reactive one but we will have to wait months before we know how well it works. The committee did revise lower their medium term inflation outlook which clears the way for further purchases from February onwards if the situation warrants. A fair few policymakers used rather soothing language towards consumers during the meeting it seems so as to soften the inflationary blow; Deputy Gov. Bean said there is “light at the end of the tunnel for consumers” while Posen stated that the spike in inflation is “very temporary”.

The merry-go-round continues to spin and swirl in Europe with few developments to speak of in the past 24hrs. Once again the Germans were at the heart of causing more concern for those seeking an agreement as soon as possible. Finance Minister Schaeuble emphasised that an increase in the EFSF was not on the table. The plans we spoke about yesterday to use the EFSF as insurance against sovereign debts going forward got a terrible response from analysts who urged European policymakers to go back to the drawing board. European equity markets were mixed at the close as uncertainty about the outcome of Sunday’s leaders’ summit remained high. French President Sarkozy traveled to Frankfurt for high level talks with German Chancellor Merkel, ECB Pres. Trichet and others.

The Federal Reserve published its Beige Book survey of the US economy last night which reminded markets that even if the European debt crisis is solved in the next 6 months there are deep-lying fundamental issues with the US economy. The Beige Book confirmed that economic activity continued to expand across the States in September, although the pace was “modest or slight” and the outlook toward business conditions continued to weaken.

The Beige Book will have contributed to the slight sense of risk-off this morning with most traders blaming the negative moves this morning merely on the fact these moves were positive yesterday.

Data today focuses in on Germany and the UK with the German Economy Ministry publishing its revised GDP forecasts today at 11am; they are not expected to be revised higher and we will see how much they differ from the current estimates of 3.0% in 2011 and 1.8% in 2012. The UK will release September retail sales figures at 09.30 which are expected to be flat following a decline of 0.2%MoM in August.

Latest exchange rates at time of writing

Indicative Rates Sell Buy
GBPEUR 1.1456 1.1484
GBPUSD 1.5700 1.5723
EURUSD 1.3684 1.3708
GBPJPY 120.39 120.67
GBPAUD 1.5428 1.5458
GBPNZD 1.9835 1.9861
GBPCAD 1.6052 1.6083
NZDUSD 0.7900 0.7921
GBPZAR 12.69 12.74
USDZAR 8.0844 8.1190
GBPPLN 4.9986 5.0278
EURJPY 104.80 105.07

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