QE Round Two? UK Edition

Pound bulls learned the hard way why we FX-Men say, “Loose lips sink pips.” Thanks to Bank of England Monetary Policy Committee member Adam Posen, the pound pared the gains it made against the Greenback and sank to a low of 1.5718. Tsk, tsk. What happened? Let’s just say that Posen just uttered those two nasty letters that send shivers down pound bulls’ spines: Q and E.

Oh, yes he did! In a speech at the Chamber of Commerce yesterday, Posen talked about how the British economy is in need of further stimulus. He said that the BOE may need to increase its 200 billion GBP quantitative easing program, seeing the divergence of recent data from recovery patterns after financial crises in the past. He warns that if the central bank doesn’t do so, there’s a big chance that economic growth in the long-run will become unstable!

Some naysayers agree with Posen and point to a weak labor market, which shows that unemployment remains high at 7.8%. The unemployment rate has been stuck around this level for the past year now, showing no improvements. Claimant count figures have also been dismal, with August’s figure indicating that there were more people who filed for unemployment claims than in July. This was a reversal of the recent trend that had showed falling claims.

Furthermore, given that the government is just about to kick in its austerity measures, some experts predict that another 500,000 public sector jobs could be lost over the next five years! With the government being forced to spend less, there could be a trickle-down effect to private companies whose main client is the government itself.

On the other hand, there are those who see the economy as a glass-half-full scenario and keep an upbeat outlook. They point to yesterday’s GDP data, which confirmed that the UK economy grew by 1.2% last quarter. For those of you keeping count, this is the best figure in nine years! Huck was but a teeny-bopper barista at that time!

In addition, others say that adding to the current 200 billion GDP stimulus package would be excessive, as the economy is showing signs of life. Yesterday’s CBI realized sales report posted its best result in six years, while CPI data has shown that inflation remains near the upper band of the BOE’s target. Adding another round of stimulus might just lead the UK to hyperinflation!

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Sure, Posen has a good point but the prospect of another round of QE for the UK could be potentially disastrous for the pound. I mean, we all saw how the US dollar got clobbered after the Fed announced that they are open for further easing.

But it ain’t over ’til the fat lady sings – until the BOE monetary policy committee makes their decision, that is. Their next monetary policy statement is scheduled next week and it will be interesting to see if they have shifted their stance or not. Meanwhile, the minutes of next month’s meeting are due October 20 and this could reveal whether Posen was able to convince his fellow MPC members that more QE is the way to go.

Posen’s speech might have also ruffled the committee’s lone hawk’s feathers. Andrew Sentance has been hollering for a rate increase since June, doing it for the fourth consecutive time in September. This could turn into a nasty tug-o-war between the two!

In the meantime, the UK is set to release a chockfull of top-tier economic data which could be crucial in confirming if the odds are tilted in favor of further QE. This week, a couple of housing price indices are due along with the UK’s manufacturing PMI while next week has construction PMI, services PMI, and manufacturing production on deck.

I’m sure BOE policymakers will be watching these reports like hawks and so should you! Keep in mind that worse than expected figures could spark a pound selloff as traders become wary of a dovish BOE policy statement. Better stay on your toes then!

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