Following a central bank decision by the Bank of England, traders look towards the minutes report that is released approximately 2 weeks afterwards. Although the report doesn’t tell the market what it doesn’t relatively already know, the meeting notes shed a little color behind the actual decision. Aside from revealing if the vote was unanimous or split, the report explains the why, how and why not of the recent board or governors’ meeting decision. Now with the worst recessionary conditions in decades still looming over the UK economy, the text of these minutes will have more bearing on the market than previously released versions.

The Scoop

Taking a look back into the previous two decisions, one can see that central bankers are not even concerned with inflationary pressures any more. The board’s own Governor Mervyn King has recognized that consumer price increases are set to remain stable to slow, following a spike up to over 3 last year. Now the concern looks to be in the way of slower productivity and consumer spending. As a result, central bankers are likely to keep the interest rate at 0.50 percent – this we already know.

Additionally, given basic economic theory, lower interest rates lead to a more expansionary policy. The idea is coupled with the fact that lower benchmark interest rates will hopefully bolster increased spending as credit markets thaw and consumers and smaller businesses can support more spending on both levels – this we also know.

What we don’t know is whether or not further quantitative easing will be given the green light. This single point is the critical piece that has sparked the attention of both currency and fixed income traders. To date, the Bank of England is already an arm’s length away from reaching its GBP125 billion benchmark later this month as policy makers look to keep rates low. Subsequently, this means that the government is already at over 80 percent capacity of its maximum allotment for purchases of GBP150 billion.

BoE Pumps GBP150 Billion

Don’t Hold Your Breath

Even as some call for the final allotment (and maybe even more QE to be set in place), the likelihood of that actually happening remains next to none. Positive economic improvements have been seen on the horizon as the MPC has stated in the past that growth is likely to rebound in coming years as the downturn has “receded somewhat” with a “stabilizing” housing market. But more importantly, an increase in fixed income purchases in order to control lending markets will likely become all for nothing as traders exit the British Pound on lingering concerns of an economic collapse. Should central bankers increase the flow of currency, the supported volume is surely to not only devalue the underlying currency but sow the seeds of inflationary pressures not felt for three decades.

What To Look For

Given the complex interpretations of central bank rhetoric, currency traders will likely take an expansion or secondary offering on QE to decrease the pound’s potential for further upside. Why? A more stable economy is less likely to depend on QE and continue the en vogue thought of a global economic turnaround hovering over the last week or so. The only caveat remains in the mention of further economic downturn and deterioration, which could spark a reversal on currently bullish sentiment.

Tags: Bank of England, British Pound, Foreign Exchange, gbp/usd, quantitative easing, Sterling

This entry was posted on Monday, July 20th, 2009 at 2:59 pm and is filed under British Pound, Currency Trading, Economic Indicators, Feature Articles. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.