In These New Times

A new paradigm for a post-imperial world

British pound to reverse course as BoE expands QE

Posted by seumasach on February 4, 2012

The British Pound extended the advance from the previous month to reach a fresh yearly high of 1.5882, but we are going to see the sterling come under pressure next week should the Bank of England take additional steps to stimulate the ailing economy. Although the BoE is widely expected to keep the benchmark interest rate at 0.50%, all of the 50 economist polled by Bloomberg News see the Monetary Policy Committee expanding its Asset Purchase Facility beyond the GBP 275B target, and the central bank may keep the door open to expand its balance sheet further in an effort to stem the risk of a double-dip recession.

This is a rather immodest proposal framed framed in the most modest terms: “Bankers of the realm, do you accept another tranch of newly minted cash in exchange for the worthless assets you are still holding on your balance sheets without daring to mark to market? We do!” reply the blushing bankers in unison, “till death us do part” Thus we will see in the coming weeks the consumation of the marriage between our elected representatives and the City if London. Of course, the BOE claims the money is for purchase of government securities rather than further bailout. They would say that and its hardly good news that we have to print money to sell guilts. Still, this will be at least in part another bailout of the banks, gratefully accepted. It is this money printing prowess that our pundits have been boasting about as the great trump card of the British economy which still has its own currency, unlike the hapless Greeks. Yes, but if we are to devalue our currency in perpetuity why would anyone accept or hold assets denominated in it. they would only do so if they had no choice- if all the other options had been knocked out. Hence the desperate campaign against the euro, but the euro will continue to be a viable alternative and the emerging econo ies are looking into new ways of bypassing the dollar and the pound. The “bearish” forecast is thus more than justified with all the horrors that that entails for an economy totally dependent on imports.

Fundamental Forecast for British Pound: Bearish

Daily Fix

4th February, 2012

 

The British Pound extended the advance from the previous month to reach a fresh yearly high of 1.5882, but we are going to see the sterling come under pressure next week should the Bank of England take additional steps to stimulate the ailing economy. Although the BoE is widely expected to keep the benchmark interest rate at 0.50%, all of the 50 economist polled by Bloomberg News see the Monetary Policy Committee expanding its Asset Purchase Facility beyond the GBP 275B target, and the central bank may keep the door open to expand its balance sheet further in an effort to stem the risk of a double-dip recession.

 

BoE board member Adam Posen struck a highly dovish tone for monetary policy as he expects to see subdued inflation in 2012, and said that there’s a case for another GBP 75B in quantitative easing in light of the ongoing weakness in the real economy. In contrast, MPC member David Miles argued that it’s presumptuous’ to assume that the central bank will raise the limit on the APF as policy makers expect the economic recovery to gather pace ‘through this year and into next year.’ Indeed, the opposing comments from the BoE could foreshadow a rift within the MPC, and we may see the committee preserve a wait-and-see approach in the first-half of the year as the fundamental outlook for the region remains clouded with high uncertainty. Meanwhile, the National Institute for Economic and Social Research encouraged Chancellor of the Exchequer George Osborne to draw up a stimulus package as the group forecasts the U.K. economy to contract 0.1% in 2012, and calls for fiscal stimulus may keep the BoE on the sidelines as monetary policy remains highly accommodative.

 

As the GBP/USD breaks out of the upward trending channel carried over from the previous month, we may see a short-term reversal pan out next week, but the exchange rate may track sideways ahead of the BoE rate decision as long as the 38.2% Fibonacci retracement from the 2009 low to high around 1.5730-50 holds up as support. However, the BoE rate decision could spark a sharp selloff in the exchange rate as the central bank maintains a cautious tone for the region, and a break and a close below the 10-Day SMA (1.5716) could pave the way for a test of the 50.0% Fib around 1.5300 as fundamental outlook for the U.K. deteriorates. – DS

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