"Much Ado About…Not Much?" - RBS say Bank of England is not going to do anything in August - has the pound been oversold?
- Category: Exchange Rates
- Published on Wednesday, 01 August 2012 11:34
- Written by Will Peters
"The monthly meeting of the Bank of England is likely to be equally unimportant in driving markets near term" - Robert Sinche at RBS.
The pound sterling (Currency:GBP) is struggling today. The UK currency is down against the majority of major currencies as investors get ready for the Bank of England to tomorrow announce further measures to shore up the economy.
RBS warn, in a note entitled "Much Ado About…Not Much?" that markets could be getting ahead of themselves, and in extension we feel this suggests the recent sell-off in sterling is over-extended.
The note by Robert Sinche at RBS says:
"The monthly meeting of the Bank of England is likely to be equally unimportant in driving markets near term. Rather than 'reinventing the wheel', we will quote directly from our UK economics team. "With a further three months of scheduled QE gilt purchases, alongside the activation of the new Funding for Lending Scheme (FLS), there is little prospect of any further BoE policy activity in August.'"
However, Sinche does go on to say: "With almost no economists expecting policy action, a surprise rate cut could seriously weaken GBP."
This note could have been produced ahead of the current weakness we are seeing, thus signalling market views over the probability of Bank of England action is changing.
Even without policy change the pound will be vulnerable, particularly to the US dollar. "Even without a policy shift, we continue to recommend short GBP/USD exposure," says Sinche.
Of more interest to currency markets is the ECB announcement on Thursday.
"After the aggressive move to ease both the repo and deposits rates in early July, one might have assumed that the ECB would hold policy stable this month, similar to our expectation for the BoE MPC.
"However, ECB president Draghi “raised the bar” for the ECB last week by promising to do “whatever it takes”, within its mandate, to preserve the EUR. Given this preview, it seems almost incumbent on the ECB to take some initiatives at its 2 August meeting. The problem, however, is exactly what they might do at this juncture."
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