Sterling Hit from Every Direction as BoE Weigh In

The currency markets have been shaken from the outcome of not only the spending review that was announced yesterday but also the Bank of England’s three way split over policy regarding Quantitative Easing.

Seven members voted for no change to interest rates and no additional stimulus spending, while one person wanted to see rates rise.

The ninth member, Adam Posen, voted to see QE, the bank’s main stimulus measure restart which would involve the printing of money which would be pumped into the economy to try and boost the recovery, yet on the other hand load national debt for generations to come.

The minutes of the policy meeting held earlier this month showed that Mr Posen called for a further £50bn to be put into the QE programme, while Andrew Sentence voted for a rise in interest rates for a fifth month in a row.

The minutes offer some backing to the sentiment behind Bank of England Governor Mervyn King’s statement on Tuesday which suggested that QE may soon be necessary as the economy is ‘barely growing at all’.

This is the first call for additional policy stimulus since November 2009 and while the majority thought that the balance of risks has not changed enough to warrant immediate action, some felt that the chances that more stimulus would be needed had increased in recent months.

Looking at currency movement, Sterling came under pressure versus the dollar and the euro over yesterday’s trading session and overnight as the markets reacted to the tone from the Bank of England and the release of dome ‘heavy handed’ spending cuts which Chancellor George Osborne has defended today.

Speaking with the BBC, Osborne claimed that he made a conscious decision to “curb the rise on the benefits bill” so that investment in schools and the NHS can continue.

“That has involved some hard choices, but I think they are fair choices. We have got to put the welfare state on a sustainable footing and we have got to reform it so that it always pays to work” he continued.

Markets seemed so on edge expecting the budget cuts to be so detrimental to the fortunes of sterling that the response was relatively muted in the aftermath of Osborne’s announcement. The fall-out may however take weeks to be fully appreciated.

Fundamental news this morning has further weighed onto the pressures on the pound with Retail Sales unexpentantly dropping in September for a second month as consumers bracing for the government’s budget squeeze curbed spending on the items from clothing to fuel.

Sales fell 0.2% from August, when they declined 0.7%, the Office for National Statistics said today in London. Economists predicted a 0.3% increase, according to the median of 25 forecasts in a Bloomberg News survey. On the year sales rose 0.5%, the least since January.

The pound has moved down to 1.1252 versus the euro and stood relatively firm against the US Dollar, which has it’s own problems – more of which should become clear in the next week or so at $1.5730.