Bank Of England (BOE) Minutes Show That Further Easing Is Likely…

(UK) Bank of Englad (BOE) Minutes did not show any discussion of a cut to bank rate. And reiterated that the MPC would assess funding for lending scheme over coming months. The MPC did note that it might have had more benefit than assumed in Aug forecasts. MPC discussed whether to expand or continue with Gilt purchases announced in July. For most MPC members it was relatively straight forward to agree to continue purchases

(UK) BoE’s Fischer reiterated the BOE majority view that QE was more powerful than rate cuts for stimulus.

(UK) BoE member Bean: There has been some traction from QE but hard to guage impact on demand

• Inflation likely to edge down later this year and into 2013
• Economic growth has been weaker than expected
• Recent uptick in inflation data does not alter the bigger picture on its outlook

(UK) Aug 8th 2012 – BOE Gov KIng noted that a rate cut would harm some institutions and not change the economic outlook significantly.  In June MPC discussed merits of cutting rates but saw no advantage over further QE.

How to interpret these headlines?

With Bank of England being rather open with its monetary policy directions, it takes no genius to see that BOE is likely to keep rates at the current level of 0.50% until the economy recovers, but will increase its APT in upcoming meetings.  Most analysts are considering another £50 billion of increase by year end, making the total APT of £425 billion.  This continuous support by the BOE is likely to keep Sterling well bid, especially considering that since UK’s economy has been in a technical recession, more stimuli could only help its economy.

With the market trading in a tight range waiting for the next high impact catalyst, GBP is likely to follow risk sentiment rather than its own fundamentals, as the current exchange rate has already priced in the fundamentals… And by observing how GBPUSD has been trading lately, I am inclined to believe that the next breakout move for the GBP should be to the upside.

FUNDAMENTALS

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