Hola amigos,

Well another week has passed and didn’t it just fly past? – aided by the Bank Holiday of course! Don’t you just love a four day week?

It was a huge week for sterling last week as the eagerly awaited Bank of England interest rate decision was announced on Thursday.  The expectation in the build up was to maintain Interest rates on hold at 0.5% with the decision on QE to take the spotlight. As we drew closer the expectation escalated that the Bank of England would expand, the question was by how much?

The decision in the run up was hotly debated as to whether expansion was necessary and arguments could be gleaned from both sides.  The reasons for expanding are very apparent; the recent dire GDP number, rising unemployment, dire public finances and banks that are still not passing on this increased liquidity. On the other hand most major economies are now looking at exit strategies from unconventional measures and there is a danger that over cooking QE could stoke inflation and lead to an inflationary problem and sharp interest rate increases to combat this. At the same time there are whispers that the Q3 GDP will be revised upwards and that Q4 GDP will show an exit from recession and a slow recovery for the UK. So the arguments and the significance of the decision were evident, the Bank of England are walking a fine tightrope and they do not want to topple either way and obviously stay on track in controlling inflation.

In the end the vote as expected was to leave interest rates unchanged at 0.5%. However Quantitative Easing was expanded by £25 billion to take the programme to £200 billion of money created to buy debt. This was less than many expected and in the accompanying statement the Bank of England were slightly more upbeat on a pick up in economic activity and the market has taken the perception that we will now see at the very least a pause in the programme. This changes the perception towards exit strategies and to a more hawkish tone…this has given sterling a boost even in the light of the decision to expand QE. The market is looking forward and the prospect of the next quarter showing the UK economy returning to growth and the halting of further QE.

So the pound survived a major risk event unbloodied and actually in good nick.  We could now see sterling start to edge higher as confidence creeps back into the pound…the key level to claw back to is 1.15 before we can get excited.  One problem holding the pound back is the relative strength of the euro against the USD which is trading at just under 1.50; if this falls lower then GBP/EUR would receive a boost higher.

Hasta la proxima!