The pound fell against the majority of the 16 most actively traded currencies in the market yesterday including the euro and US dollar after Bank of England (BoE) Monetary Policy Committee (MPC) member Adam Posen repeated his call for his colleagues on the MPC to join him in voting for an expansion of the bank’s asset purchase programme, commonly known as Quantitative Easing (QE) in an effort to invigorate the UK economy away from a double dip recession.
Posen said the next round of QE should start with £50 billion in gilt purchases. This could later be increased to between £75 billion and £100 billion. Posen pointed to the gloomier outlook for the UK following recent external developments.
Recent data certainly seems to support Posen’s argument. The Office of National Statistics reported that the UK seasonally adjusted net balance of trade in goods and services was £4.5 billion in July, virtually unchanged from the month before. The deficit in the trade on goods also remained virtually without change, at £8.9 billion while the services trade surplus improved slightly, to £4.5 billion. Inflation data also came in as expected and housing data was mixed. All in all, there is little sign of an improvement in the outlook in the UK economy.
Nevertheless, the pressure on the euro continues after the Italian Treasury succeeded in issuing €3.8 billion of 5-year debt yesterday morning but at a cost of a marginal interest rate of 5.6%, a euro era high.
The head of the world’s biggest bond trader PIMCO, Mohamed A. El-Erian commented yesterday that “We’re getting close to a full-blown banking crisis in Europe,”
The markets await the result of a meeting today between German Chancellor Angela Merkel, French President Nicolas Sarkozy and Greek Prime Minister George Papandreou as speculation grows about a Greek default and the implications for the European banking sector of such a default. Credit ratings agency Moody’s Investors Service cut the credit ratings of France’s Credit Agricole SA and Societe Generale on Wednesday, citing their exposure to Greece’s debt, a fresh blow to euro area leaders struggling to restore confidence in the region
The risk aversion theme continues to dominate the markets with the US dollar reached a eight month high against the pound and a seven month high against the euro.