Quantitative Of Solace
5 July, 2012
The markets are holding their breath this morning in as policymakers from the Bank Of England meet to discuss the possibility of further quantitative easing. Considering the UK’s flagging economy, and the lack of QE in recent months, analysts expect the bank to announce adding more money to the UK economy today. This move, however, has been widely anticipated, so whilst it will almost certainly weaken sterling to some degree, it won’t be to the same extent as an unexpected round of QE, therefore we shouldn’t see any major drops in exchange rates. There is always the possibility, however, that the BoE will inject more money into the economy that previously anticipated. This will prove a shock to the markets, and cause sterling to weaken.
Slightly positive news in the Eurozone yesterday, as sales in the euro area edged up 0.6% in May, although this recovery is still seen as sluggish, as sales dropped 1.4% in April. In France, one of the comparatively strong economies of Europe, the recently elected President Hollande announced plans to raise taxes on businesses and the richest households by 7.2bn euros, whilst also raising the taxes on banks and oil companies. Market analysts reaction to this decision has been mixed, and it remains to be seen how the exchange rates will be affected by it, especially as, on Tuesday, the French government was forced to reduce its forecast for economic growth, as well as the entire service sector for the Eurozone continuing to shrink in June as business confidence plunged. Any major drops or gains in the euro/sterling exchange rate were checked by sterling’s own weakness in the face of further QE.
There was very little data from the other side of the Atlantic yesterday, as the United States celebrated Independence Day. However, some might think they have little time for celebrating, as the IMF cut its growth forecast for the US economy to 2% this year from an earlier estimate of 2.1%, calling the growth in the US ‘tepid’. The IMF also warned that the US economy will likely be affected by the ongoing Eurozone debt crisis, reminding people that the concerns in the Eurozone are big enough to affect the entire world. Despite the negative news from the US, sterling rates dropped slightly against the dollar yesterday afternoon.
Obviously the big news today will be the QE decision. Whilst many see further QE as a foregone conclusion, there is no doubt the rates will be affected whatever happens. If you have any currency requirements in the foreseeable future, it may be a good idea to contact your account manager at Currency Index in order to discuss the best options, and for assistance in getting the best exchange rate.
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