Bank of England holds interest rates at 0.5% and QE at £200bn as forecast

January 8th, 2010 by Toby

Pound:
The pound has regained some of it’s losses after falling to the lows of the week yesterday. The BoE did nothing to surprise the market yesterday and in line with forecasts paused on QE and interest rates. Many economists are now expecting February to be a critical month for the pound with the release of the BoE quarterly inflation report which also provides an update on our central bank’s latest growth outlook. Many are also expecting this to be the month where an exit strategy for QE is released as economic aid begins to wind down.

As you are no doubt tired of hearing by now, sterling’s short and medium term outlook will be dominated by concerns over the UK’s public finances and political uncertainty leading up to the general election. The BoE who have hoped that sterling’s depreciation will improve our competitive advantage and move the UK out of recession is expected to be given a lift later this month when preliminary GDP (growth) figures are released. Any move back towards growth may spur the BoE to start raising interest rates again, and citigroup have forecast these to be at 1.5% by June. However, in a report Citigroup cautioned that “rises in rates driven by higher inflation should be less positive for a currency than those associated with economic growth, and they have the potential to exert drag on an already fragile recovery” highlighting in the current environment this may not have the positive impact many would expect.

No change I’m afraid for sterling’s outlook on this bumpy road to recovery. Have a mental weekend!

US Dollar:
The Dollar held steady against the Euro and was pushed back slightly against Sterling while still trading in narrow ranges before the U.S non-farm payroll data released at 13.30 GMT today. With investors cautious about the jobs data, Both EUR/ USD and GBP/USD are expected to trade in tight ranges this morning. Sterling corrected itself slightly against the Dollar after recent losses yesterday. While many economists’ expectations point to a small job loss in December from the payroll data, some in the market expect the data to indicate a positive figure. This would help the Dollar advance against the Euro, especially with sovereign debt concerns remaining in the Euro zone. It is expected that strong data could reinforce the Dollar’s recent tendency to react positively to strong U.S data, although if weaker than expected, the data could serve to lead to Dollar selling and a weakening of the currency against the other majors. GBP/USD 1.6020, EUR/USD 1.4328.

Euro:
The Euro was down marginally against the Pound and unchanged against the Dollar as positive German export figures for November weren’t enough to provide any tangible gains against the other majors. The U.S payroll data will influence EUR/ USD with positive figures pushing the Euro back against the greenback. Other than this major data release stateside, Euro zone unemployment and German Industrial Production could move the Euro. If the Unemployment rate rises to 10% it could weaken the Euro, 8.5% is forecast. If Industrial Production rises as expected to 1.1% in the largest economy in Europe, Germany, the single currency could receive a boost, although last month saw a drop of 1.8%.

Investor confidence in the Euro zone is still down but events in the U.K aren’t positive enough to provide trading differential, so the Dollar is currently the main threat to Euro strength – U.S job data later today will confirm or deny this current trend. GBP/EUR 1.1134, EUR/USD 1.4328.