The Pound to US Dollar exchange rate plummeted by a staggering -2.0 cents yesterday to reach a, multi-year, 31-month low of 1.5194 (GBP/USD) as the Bank of England Minutes Report suggested that the UK Central Bank is on the verge of implementing another round of quantitative easing, and the FOMC Minutes revealed that some policymakers were anxious to bring about an end to the Fed’s open-ended QE scheme.
GBP/USD plunged to a rate not seen since July 2010 yesterday evening as markets reacted to the Federal Open Market Committee’s surprisingly hawkish Minutes Report, which revealed that policymakers are concerned about the effects of the Federal Reserve’s $85 billion per month scheme:
“A number of participants stated that an ongoing evaluation of the efficacy, costs and risks of asset purchases might well lead the Committee to taper or end its purchases before it judged that a substantial improvement in the outlook for the labour market had occurred.”
Fundamentally, the Minutes indicated that the FOMC is worried that that QE3 is pumping excess liquidity into financial markets, which could lead to dangerous risk taking from traders.
The news benefited the US Dollar in the same way that the Bank of England’s Minutes Report damaged the Pound; quantitative easing is seen to devalue a currency because it brings down sovereign bond yields, which in turn can reduce the return on assets denominated in the domestic currency.
Sterling’s horrendous day started with news that three Monetary Policy Members, including the BoE Governor Mervyn King, had voted to raise the asset purchasing target to £400 billion. Although the MPC voted 6-3 against any additional quantitative easing this month, the extremely dovish report, which even mentioned the possibility of an interest rate reduction, significantly increased the probability that the BoE will step in with further monetary stimulus in the next few months.
As markets priced-in the enhanced likelihood of further monetary easing the Pound tumbled to multi-month lows against the majority of its currency peers. The Pound declined by around -0.7 cents to a 15-month low of 1.1411 (GBP/EUR) against the Euro, Sterling hit a 17-month low of 1.5534 (GBP/CAD) against the Canadian Dollar, and the UK Currency also depreciated to a fresh 6-month low of 1.4786 (GBP/AUD) against the Australian Dollar.
In other UK economic news, the headline British Unemployment Rate inched higher from 7.7% to 7.8% during December, but the total number of people in employment grew to a record high of 29.73 million.
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