By:William Doody
As the Bank of England concludes its July policy meeting today, expectations run high that an additional £25 billion of quantitative easing measures will be announced, even as the headline interest rate is held steady. This move may undermine the recent strength in the Pound as nervous investors have been moving towards currencies perceived as having a lower risk profile. Meanwhile, economic data coming from the U.K. continues to point to an anemic recovery at best, with the possibility of a flat or even negative turn still ahead. Furthermore, the earlier anti-Dollar comments coming from some participants at the G-8 summit have been toned down and several pro-Dollar statements have been made in recent days, thus removing some additional downward pressure from the U.S. Dollar.
For these reasons, we would continue to be a seller of the Pound against the Dollar. It seems unlikely that the U.K. economy will stage a meaningful recovery in the second-half of 2009 and this will force the BOE to maintain low rates and to steadily increase their quantitative easing measures. This combination will continue to pressure the Pound, especially against safe haven currencies such as the Dollar and Yen. If the economic indicators from China continue to improve, this will strengthen commodity currencies, such as the Australian and Canadian dollars. Likewise, if Eurozone data shows signs of a second-half recovery, the Euro could appreciate considerably against the Pound. Some early signs of this have been seen in the sharp uptick in manufacturing data from Germany released earlier this week. Thus, we remain pessimistic in our outlook for the British Pound.