By now, it's old news that the Bank of England (BOE) is leaning closer towards more quantitative easing (QE). As a matter of fact, I've already written all about how MPC member Adam Posen tried to get the ball rolling for more QE by being the first and only member of the committee to vote for an immediate increase in the asset purchase facility. The question is, will more take up his banner?
No matter how you look at it, you're bound to find some reason to further stimulate the economy. Globally, we face the threat of a slowdown as some of the global economy's greatest flag bearers face tough challenges. While the U.S. struggles with an ailing labor market and weak consumer confidence, Europe has been plagued by debt woes and rising concerns of a Greek sovereign debt default.
On the domestic front, things aren't much better for the U.K. Consumer confidence is also at a low, as evidenced by the 0.2% drop in retail sales in August. And as if the U.K.'s lackluster performance in Q2 2011 wasn't bad enough, many are in agreement that things will take a turn for the worse in the second half of the year.
With so many reasons to boost the economy with more stimulus, many are expecting other MPC members to join Posen in voting for more quantitative easing. But could it be that Posen has already found a new member for his wolf pack? Enter Ben Broadbent.
Ben Broadbent, the newest member of the MPC, said in an interview yesterday that he actually nearly voted for an increase in the BOE's QE program Adam Posen. According to Broadbent, he was "reasonably close" and that it wouldn't really take much deterioration in the U.K.'s economy to push him over the edge.
He added that the U.K.'s economic outlook wasn't exactly something they could control since it would be largely dependent on euro zone's actions to fix Greece's debt problems.
In any case, the next round of asset purchases from the central bank will probably be similar to their first program, in which the bank printed money to purchase U.K. government bonds.
As a result of Broadbent's grand revelation, market participants have changed their forecast on the possibility of additional quantitative from the BOE in the next two months to 75% from 25% in August.
With odds like that, I'm sure quite a number of traders are looking at GBP/USD for possible trades!
Fundamentally, traders might think that a second round of quantitative easing in the U.K. is the MPC's recognition of the deterioration of the economy. Sure it also means more money to stimulate economic activity, but with other major economies like the euro zone and the U.S. also struggling to gain traction, the impact of the QE program might be limited.
In addition, if we take a look at GBP/USD's 4-hour chart we can see that the pair's recent upswing hardly indicates a reversal of a trend. In fact, it looks like it's just a retracement with the 50% Fib holding in the 1.5595 area.
For now it looks like the odds are lining up in favor of another quantitative easing in the U.K. But keep in mind that there's still a few more weeks left before the MPC votes on the issue again. A lot could happen over the next few days, so make sure you stay in touch with the latest fundamental news, okay?
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