Sterling drops on possible additional quantitative easing

07-07-2009 12:12

The Pound Sterling dropped more than 200 pips on the back of possible extra quantitative easing by the Bank of England, to be announced at the next policy meeting. It is expected that the current purchase program, which will end soon, will be extended by another £25 billion. The MPC will probably keep their benchmark rate unchanged at 0.5% this Thursday, while the economy continues to face downside risks. In the initial quarter growth showed a record decline of 2.4%, which will reduce the effects of attempts by the administration to stimulate growth.

Victim of prevailing risk aversion

The Single Currency also suffered from dominating risk aversion, while the EUR/ USD dropped under 1.4000, where the Euro has started to strengthen. For the first time in three months, the Euro-Zoe Sentix investor confidence gauge went down from -27 to -31.3. Meanwhile, an increase to -25 was forecasted by economists due to growing optimism, which is the result of incoming stimulus attempts and weaker interest levels. Worldwide fears are growing that the intensity of the slump will make it hard for the job market to come across traction, reducing the prospective of any improvement.

First to emerge

The Japanese Yen went up on the back of rising fears regarding growth and as a result of the Bank of Japan providing an improved outlook for the Japanese economy. For the first time in three years, Japan’s central bank increased the forecasts for the region’s economy, as a result of growing optimism, caused by increasing exports, and due to the stable situation of the economy. Masaaki Shirakawa, governor of the Bank of Japan, commented: “the recession indicates a slower pace, proved by the real economy and by financial signs.” Japan might be the first nation to leave the global recession behind since it profits from the Chinese internal growth.

ISM non-manufacturing

The demand for safe-haven yields continues and provides the Greenback considerable support, while concerns rise that the impact of a worldwide improvement will be restraint. It is possible that American traders join dominating risk aversion, on which the US Dollar could advance during today’s trading session. Furthermore, Joe Bide, Vice President of the United States, declared that Obama’s government miscalculated the intensity of the job losses and the economic improvement, which could destroy confidence among investors. The economic agenda only consists of the Institute for Supply Management (ISM) non-manufacturing, which is expected to increase from 44 to 46. The non-manufacturing segment covers more than 70% of the Gross Domestic Product (GDP) and an increase may frustrate some fears and reduce the support for the Greenback. Currently the Dollar is weakening and the optimistic figures may lead to a conversion in sentiment. On the other hand, if the ISM non-manufacturing gauge turns out disappointing, rising concerns will be demonstrated and increase dominating Greenback strength.