Daily World Market Update BOE surprise markets with £75bn QE

Mervyn and the MPC have got their bazooka out once again and the reasons are simple and obvious; strains in funding markets, slackening global economy and a consumer that is scared of spending money. We had expected the Bank of England to hold QE today with the belief that they would wait on measures from the European finance ministers’ meeting in Cannes at the beginning of November but they have obviously had enough of the deterioration in global finances. We think the fact that they have gone harder and earlier is a sign that the Bank of England are rightfully very concerned as to how the Eurozone will affect the world economy. We just have to hope that our QE2 works better than that of the US.

In the short term, sterling has been smashed on this news and we would expect it to continue its decline over the coming days. Near term targets will be 1.50 in GBPUSD and 1.14 on GBPEUR. You have to think that sterling will stay unloved in the short term. As the world economy tips back towards a global recession every central bank knows that the export market is the key to growing a way out of the downturn and the simplest way to grab more exports is a weak currency. This ‘competitive devaluation’ strategy was started by the Fed’s first round of quantitative easing and has been perpetuated by further plans to weaken policy. The latest include the Federal Reserve’s Operation Twist and the Swiss National Bank’s franc floor versus the euro. There is also the belief that the £75bn launched today is but the opening salvo and that a further £225bn could be used in coming quarters.

In other central bank news, The ECB held the rates at 1.5% and announced a round of covered bond purchases to the tune of EUR40bn; quantitative easing in other words. Trichet said the bank will also provide long term liquidity to banks by conducting loan operations over the course of the next year. It was also clear from Trichet’s speech that the decision to hold rates had not been unanimous and this justifies our confidence in a rate cut from the ECB next month as Mario Draghi takes over.

This morning we have seen the ratings agency Moody’s downgrade 12 UK financial institutions. The rating actions include a one-notch downgrade of Lloyds TSB Bank, Santander UK, Co-Operative Bank, a two-notch downgrade of RBS and Nationwide Building Society and downgrades of up to five notches of 7 smaller building societies. The action is as a result of government support for these institutions being gradually withdrawn according to the statement.

The economic data is now more in focus today following the week’s central bank action with the main focus being the US jobs number at 13.30. Jobs are expected to have risen last month, with analysts giving a consensus of 55k jobs added.

Events in Europe cannot be forgotten of course with EU Economic Commissioner Rehn speaking this morning while Chancellor Angela Merkel holds a press conference with the Dutch PM at noon.

Source: FXStreet.com

06.10.2011