Pressure to ease monetary policy

andres del risco

The ‘balanced relationship’ between further bad news and monetary policy authorities doing something about it has continued to lead the market through the first session of this week.

The Bank of England has been one of the central banks that has taken pre-emptive action to try and head off another global slowdown with direct action. This was courtesy of the extra £50bn of QE it voted for at the most recent meeting.

China and the ECB have also eased policy in their own individual ways. However, the one that everyone want’s to see get involved is the Fed. Chinese cuts scared the market, US policy is what the market wants to heal itself with. Ben Bernanke speaks to Congress later today and any changes in language suggesting that further easing is on the cards should see the dollar sold heavily. With US inflation due out in the early afternoon a high figure may deter further asset purchase.

The IMF released their latest appraisal of the global economy and you won’t be surprised that the front pages aren’t full of pictures of Christine Lagarde wearing a party hat. Seemingly every global economy was downgraded with it obvious where the largest drops were found. The UK’s expectation fell to 0.2% for the entirety of 2012 (revised down from 0.8% just 3 months ago) – the odds of it being revised further lower or missing the already low expectations are fairly short you would think.

The IMF made a specific plea for the ECB to take further similar action to support the periphery yesterday, although previous calls have fallen on deaf ears.

Still here in the UK, and in light of the extra QE, CPI will be in focus. Inflation has dipped sharply through the beginning of 2012, mainly as a result of a large drop in oil prices. These declines have slowed in the past few months and therefore the inflationary slip back towards target has also.

The release that will gain the most headlines today is not any economic data, but instead the testimony of King and Tucker following Jerry Del Missier’s testimony yesterday. This definitely has the potential to give sterling a hit, although markets may be unwilling to commit pre-Bernanke.

Overnight we have seen 13 Italian banks downgraded by Moody’s although the reaction was muted.

Latest exchange rates at time of writing

Indicative Rates Sell Buy
GBPEUR 1.2710 1.2740
GBPUSD 1.5630 1.5650
EURUSD 1.2280 1.2300
GBPJPY 123.40 123.70
GBPAUD 1.5180 1.5205
GBPNZD 1.9550 1.9580
GBPCAD 1.5840 1.5870
NZDUSD 0.7975 0.8005
GBPZAR 12.7680 12.8130
USDZAR 8.1610 8.2010
GBPPLN 5.3050 5.3320
EURJPY 96.90 97.25

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