Pound declines sharply on increasing possibility of more quantitative easing

04-09-2009 16:14

The pound reached an intraday high of 1.4741 and dropped sharply ahead of the BoE interest decision and the UK Producer Price Index (PPI) data. In spite of the outlook that the central bank will remain its rates at 0.50%, the GBP/ USD fell over 100 pips. The UK PPI slowed to 2.0%, which is the slowest pace in 20 months and proved the central bank’s point of view that inflation will frustrate their 2% target rate. For that reason worries for additional quantitative easing grow as the Bank of England seems to ease credit conditions and head off deflationary circumstances. The pound could remain weak if the MPC indicates more measures to improve liquidity on the markets or state that their present attempts are not sufficient.

Japan: larger stimulus package

During last night’s trading the USD/ JPY reached a 100.29 level as a result of the rising demand for high-yielding assets and due to the stimulus package announcements. Japan’s ruling party requested a larger stimulus package that consists of additional tax cuts and spending ¥15.4 trillion, while the Japanese administration attempts to solve the worsening recession. The yen dropped to 99.80 and a recovery is necessary as traders starts to bet ahead of the Easter holiday.

US trade deficit expected to remain unchanged

The greenback declined against the euro and commodity currencies but rose against the sterling. Risk appetite is the dominating theme, which could influence the dollar during the US trading session. Traders could also choose to wait and reduce risks during tomorrow’s Easter holiday. For that reason, stocks may be less popular, which would stimulate the greenback. The US trade balance will present the most event risk as the US trade deficit probably will be stable at -$36 billion, while poor internal and global demand could frustrate each other. The ICSC store sales report and the first jobless claims will attract some attention as a result of the possible internal growth. It is to be expected that the unemployment rolls will be stable above 600,000 as consumer demand is expected to drop by 0.80%, indicating that the contracting labor market continues to reduce consumer spending.