YB Currency Update – Thursday 24th September

YB Currency Update – Thursday 24th September

There was a lot of trepidation yesterday ahead of the of the release of the MPC minutes, but the minutes actually proved to surprisingly positive, with the MPC voting 9-0 to keep rates and the QE measures as they were. Of course this being the BoE there was still the usual warnings about false dawns, and that the spare capacity in the economy meaning that even as the UK returns to growth there was still downside risks to inflation. There was no mention of dropping the BoE's deposit rate for clearing banks, which is a bit of a surprise considering Governor King's comments over the last few weeks, and there was also positive comments on improvements in broad money growth and economic data picking up. Although the vote was unanimous those who voted for extra QE measures last time, still feel justified in doing so, and the threat of an extension in the future has not completely gone away, which had limited the Pounds rally after the minutes, it initially jumped to above 1.11, where it held overnight, although it has dipped back under this level in this morning's trading.

The MPC weren't the only bank making announcements yesterday, the Fed ended their meeting keeping rates on hold, as assumed, and painting their usual optimistic picture. The said that activity in the economy was 'picking up', while pointing to increased activity in the housing sector. Growth is likely to be weak for some time, and the Fed have reiterated that rates would be low for some time, which have led to further unwinding of rate expectations, and did initially lead to a fall for the Dollar. the fall was relatively short lived however as stock market slipped lower, even though there was nothing in the announcement which would point to lower stocks, and this led to a reversal of the Dollars losses. Sterling rose to almost 1.6450 overnight, although it has dropped back to under 1.63 this morning as  further comments from Governor King have weighed on the Pound.

It seems yesterday's MPC minutes were too positive for Mervyn King, who has weighed into the markets this morning commenting that people should not get carried away by growth beginning to pick up, as it is a small expansion after a large contraction. His comments have had a strong effect on Sterling, by adding that a weaker Pound is helping the necessary rebalancing of the UK economy towards a stronger exporting sector. The weaker Pound has had little effect on this so far, with the trade deficit proving to be stubborn, but King's comments feed into the feeling that the UK authorities are happy with a weak Pound. King's intervention have sent Sterling tumbling from 1.11 against the Euro, down to 1.10, below even where the fears of the MPC minutes took the rate, and the Pound has also fallen from almost 1.64 against the Dollar, down to 1.6250.

There is no UK news out today to help the Pound, so it is likely to stay on the defensive, with tomorrows business investment figures the only data release on the horizon, that may give Sterling any support.

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