DJ Forex Focus
Grinning Sterling Bears Could Be Let Down. By Katie Martin
Sterling bears haven't gone into hibernation just yet.
They are pretty bruised, as the pound has ground some 4% higher against the dollar since the middle of last month, boosted by a fresh rush into risky bets in a range of asset classes.
Still, having feasted on plentiful fodder in the warmer months, those bears are now filing their claws to sharp points, waiting for a nice new moment to pounce later this week.
The call to action will come Thursday, when the Bank of England announces its latest stance on monetary policy.
A few weeks ago, this was shaping up to be a non-event. The economic data were reasonably positive, and the minutes of the BOE's October meeting, released Oct. 21, made it clear that the monetary policy committee's decision to keep the scale of asset purchases on hold that month was unanimous. The pound duly climbed.
But that was then. Just two days later, the pound was clobbered by a grim dose of third-quarter gross domestic product data. Far from the +0.1% quarterly reading that economists were expecting, the data showed a contraction in output of 0.4%. So much for the end of the recession, and for the resurgence of sterling. The currency plunged by over 2% against the dollar that day, and hasn't really recovered since.
Suddenly, the U.K. and sterling doomsayers who have been predicting an extension to the BOE's quantitative easing scheme don't look so wacky. A GBP50 billion extension, rather than a mere GBP25 billion move, looks increasingly likely.
But if the BOE does point its big guns at the U.K. economic downturn yet again, what will sterling do? There's a good argument that a massive asset purchase scheme extension is already built into the currency's price. For all the excitement over the impact of a large expansion, it's conceivable that the currency markets will just shrug.
In any case, a big boost to quantitative easing "would be accompanied by a statement that made it clear that general prospects were improving and that the MPC would withdraw stimulus if necessary," said Paul Robinson, an analyst specializing in sterling at Barclays Capital in London. So the BOE may extend its help, but that could be the end of quantitative easing.
Perhaps the bigger risk to the pound is that the BOE opts to do nothing. Here the outcome is particularly difficult to call.
In a way, such a move would place the U.K. more in line with Norway and Australia, which are already in rate-raising mode. The pound would likely surge against the euro in this scenario, Robinson said. Expect to see a shift from current levels around GBP0.90 down to GBP0.88 for the single European currency, he said, adding that the bank would be likely to lower its euro forecasts for the coming months.
But, to the joy of sterling bashers, the pound could equally easily show the opposite reaction. Traders have already shown themselves to be nervous that other major central banks could follow the lead shown by Australia and Norway, and start to reel in economic stimulus.
"If the Bank goes against the consensus and pauses or, worse still, stops quantitative easing, the markets' fears about liquidity withdrawal will rise even more and there could be a bloodbath in stocks," said Steve Barrow, a currencies analyst at Standard Bank in London.
With sterling's close correlation to global risk sentiment, that can't be a good omen for the pound.
All in all, this could prove to be a big week for sterling, particularly as the Fed holds its own monetary policy announcement Wednesday. If it starts to look like the Fed is seriously considering turning off the liquidity taps while the BOE opens them still further, sterling could get whacked against the buck.
But, particularly in light of the pound's choppy price movements in the past few weeks, being over-confident in any sterling view at this point could be foolhardy.
As Robinson at Barclays Capital said: "Economists love 'on the one hand, on the other' discussions. It is one reason why we tend to die alone."
At 0805 GMT, the pound was a little lower at $1.6326, from $1.6398 late in New York Monday, according to EBS. The euro was at GBP0.9044 from around GBP0.9010.
The euro was very little changed at $1.4761 from $1.4768 while the dollar was steady against the yen at Y90.11 from Y90.35. The euro was at Y133.03 from Y133.44.
They are pretty bruised, as the pound has ground some 4% higher against the dollar since the middle of last month, boosted by a fresh rush into risky bets in a range of asset classes.
Still, having feasted on plentiful fodder in the warmer months, those bears are now filing their claws to sharp points, waiting for a nice new moment to pounce later this week.
The call to action will come Thursday, when the Bank of England announces its latest stance on monetary policy.
A few weeks ago, this was shaping up to be a non-event. The economic data were reasonably positive, and the minutes of the BOE's October meeting, released Oct. 21, made it clear that the monetary policy committee's decision to keep the scale of asset purchases on hold that month was unanimous. The pound duly climbed.
But that was then. Just two days later, the pound was clobbered by a grim dose of third-quarter gross domestic product data. Far from the +0.1% quarterly reading that economists were expecting, the data showed a contraction in output of 0.4%. So much for the end of the recession, and for the resurgence of sterling. The currency plunged by over 2% against the dollar that day, and hasn't really recovered since.
Suddenly, the U.K. and sterling doomsayers who have been predicting an extension to the BOE's quantitative easing scheme don't look so wacky. A GBP50 billion extension, rather than a mere GBP25 billion move, looks increasingly likely.
But if the BOE does point its big guns at the U.K. economic downturn yet again, what will sterling do? There's a good argument that a massive asset purchase scheme extension is already built into the currency's price. For all the excitement over the impact of a large expansion, it's conceivable that the currency markets will just shrug.
In any case, a big boost to quantitative easing "would be accompanied by a statement that made it clear that general prospects were improving and that the MPC would withdraw stimulus if necessary," said Paul Robinson, an analyst specializing in sterling at Barclays Capital in London. So the BOE may extend its help, but that could be the end of quantitative easing.
Perhaps the bigger risk to the pound is that the BOE opts to do nothing. Here the outcome is particularly difficult to call.
In a way, such a move would place the U.K. more in line with Norway and Australia, which are already in rate-raising mode. The pound would likely surge against the euro in this scenario, Robinson said. Expect to see a shift from current levels around GBP0.90 down to GBP0.88 for the single European currency, he said, adding that the bank would be likely to lower its euro forecasts for the coming months.
But, to the joy of sterling bashers, the pound could equally easily show the opposite reaction. Traders have already shown themselves to be nervous that other major central banks could follow the lead shown by Australia and Norway, and start to reel in economic stimulus.
"If the Bank goes against the consensus and pauses or, worse still, stops quantitative easing, the markets' fears about liquidity withdrawal will rise even more and there could be a bloodbath in stocks," said Steve Barrow, a currencies analyst at Standard Bank in London.
With sterling's close correlation to global risk sentiment, that can't be a good omen for the pound.
All in all, this could prove to be a big week for sterling, particularly as the Fed holds its own monetary policy announcement Wednesday. If it starts to look like the Fed is seriously considering turning off the liquidity taps while the BOE opens them still further, sterling could get whacked against the buck.
But, particularly in light of the pound's choppy price movements in the past few weeks, being over-confident in any sterling view at this point could be foolhardy.
As Robinson at Barclays Capital said: "Economists love 'on the one hand, on the other' discussions. It is one reason why we tend to die alone."
At 0805 GMT, the pound was a little lower at $1.6326, from $1.6398 late in New York Monday, according to EBS. The euro was at GBP0.9044 from around GBP0.9010.
The euro was very little changed at $1.4761 from $1.4768 while the dollar was steady against the yen at Y90.11 from Y90.35. The euro was at Y133.03 from Y133.44.
3 November | 
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