QE or not QE-that is the question

By: Kevin Sollitt
Sterling is likely to be extremely volatile this month with several important factors to dominate. Firstly the UK Government is expected to announce an increase in its stake of the Royal Bank of Scotland to somewhere in the region of 85%, which some commentators call nationalisation by any other name. The immediate effect on Sterling is yet to be determined but an initial downward spike could be possible given the rumours circulating last week that the Government's stake was in fact to be sold, not increased.

The Bank of England has its regularly monthly meeting scheduled for this Thursday and the likelihood now seems higher that another bout of Quantitative Easing is likely, although somewhere in the region of GBP 25 billion now seems more appropriate than the GBP 75 billion rumoured a couple of weeks ago. Rates are most likely to remain on hold.

Sterling itself has had a great run against most currencies barring EUR over the past month or so but the recent low and immediate rejection of the 0.9250 region in EUR/GBP may give cause for pause to the GBP bears and may even provide a clue to upside potential.

For example, Cable's strength in October saw a rally of almost 10 cents from high to low, 1.5700 to 1.6685. M&A activity is hotting up now that credit is somewhat thawing from its frozen status & this may also cause momentum to gather in Sterling's favour as international bargain-hunters circle to purchase great UK companies at what are knockdown prices, especially if the buyers are from other Dollar-bloc countries like Canada or Australia whose currencies have performed superbly against Sterling over the last year.

The BoE quarterly inflation report is also due later this month and we'll reassess the GBP outlook nearer the time. Notwithstanding effects of US Nonfarm payrolls this Friday, there seems a strong case to buy GBP dips. Due to the prospect of more QE having an initial negative effect perhaps the better strategy would be to buy cable towards 1.6195 (50% retrace of recent range) with a stoploss behind 1.60, objective to retest the recent highs, just shy of 1.67. Good trading.