British Pound Sterling | Currency News Views and Outlook

British Pound Sterling: Currency faces MPC QE call, BarCap say GBP/USD risks are skewed to the upside

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Category: British Pound Sterling

Published on Thursday, 09 February 2012 10:52

Written by Rob Samson

The British pound is in a holding pattern against the euro, and no major moves are expected until the central bank shows its hand on quantitative easing at midday. 

A look at the latest pound spot rates shows that: the British Pound Sterling (GBP) in Euro (EUR), GBP/EUR, is unchanged on the day at 1.1932, the British Pound Sterling (GBP) in US Dollar (USD), GBP/USD is 0.08% higher at 1.5830, the British Pound Sterling (GBP) in Australian Dollar (AUD), GBP/AUD is 0.08% higher at 1.4665.

The focus of today's MPC meeting will be the asset purchase decision, as the policy rate is universally expected to remain unchanged at 0.5%.

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Consensus expect the MPC to extend the current programme by £50bn, taking the total size to £325bn.

Sara Yates at Barclays Capital does however warn that we could be surprised by a larger number being announced, this will have positive implications for the pound dollar exchange rate:

"The MPC clearly signaled in the November Inflation Report that it believed an extension of QE was needed by forecasting inflation to undershoot the 2% inflation target by 50-75bp. Our economists believe that this inflation gap in the Bank of England's ready reckoner implies a £75-200bn extension in the asset purchase programme.

"Since then, improving data, alongside less dovish minutes from the MPC's January minutes, have led us and the market more generally to scale back our expectations to £50bn. However, the underlying distribution shows that 30% of forecasters expect a larger extension of £75bn. Because of this, we believe the risks for GBPUSD are slightly skewed to the upside for today's announcement. Longer term, however, quantitative easing generally weakens a currency."

That said, analysts at UBS have warned that the BoE could undershoot the 50bn GBP level: "Our UK economist is in line with consensus but stresses downside risks to that assessment given the moderation in data and gilt market imbalance concerns."

Today's decision is truly a hard one to call.