Pound slumps further against euro amid talk of 'QE2'
Friday 22 October 2010
Sterling slumped to just over 1.12 euro after hitting levels not seen since April earlier this week as markets saw further money-boosting measures becoming increasing likely.
News yesterday of a drop in September retail sales prompted further calls for policymakers to boost the £200 billion quantitative easing (QE) programme to help support economic recovery.
The figures came after minutes from the October meeting of the Bank's Monetary Policy Committee (MPC) earlier in the week revealed member Adam Posen had voted in favour of raising the level of QE by £50 billion.
And Bank Governor Mervyn King hinted at so-called QE2 to prevent a double dip recession when he delivered a speech in the West Midlands on Tuesday.
A second bout of QE would mean putting more pounds into circulation, which has depressed sterling, sending it down against the euro and the dollar in recent weeks - at 1.57 dollars today.
While a weaker pound could see a pick up in UK exports, it also means higher material and energy costs, which could be passed on to the consumer.
Michael Hewson, market analyst at CMC, said some investors were concerned the Bank could look to inject another £50 billion of stimulus as soon as the next meeting in November.
But he said this seemed unlikely, and added: "The decline in retail sales could just be a brief pause ahead of a pre-Christmas pick-up ahead of the VAT rise in January next year, as consumers hold back on spending until the lead up to the festive season."
Economists have said it is also likely further QE will be required to offset the impact of Chancellor George Osborne's deficit-busting spending review, revealed on Wednesday.
The coalition Government has announced an £81 billion package of cuts, which includes a £7 billion hit on welfare and some 490,000 public sector job cuts.
Kathleen Brooks, research director at Forex, said: "After the spending review and a three-way split on the Monetary Policy Committee, expectations have risen that UK growth will be uneven going forward and could be extremely weak as we move into 2011.
"The prospect of further QE from the Bank of England to plug these growth gaps possibly as early as its next meeting is now the focus in the market. This leaves sterling vulnerable to further weakness going forward."
Increased talk of further cash injections to the US economy have had a similar effect on the dollar in recent weeks.
The US Federal Reserve and its chairman Ben Bernanke have made numerous signals towards its own QE2 programme in the wake of a worse-than-expected recovery in the world's biggest economy.
But the greenback has pushed higher as a G20 meeting of finance ministers gets under way in South Korea, as traders anticipate a deal to defuse tensions over exchange rates.
The decline in the dollar's value had stoked concerns over a so-called "currency war" in which nations compete to keep their currencies from rising in value as the dollar sagged.
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