The government will announce its comprehensive spending review on Wednesday and many analysts believe this will go hand in hand with additional monetary easing to offset the adverse impact of fiscal tightening.
BoE meeting minutes also due for release on Wednesday are expected to show policymaker Adam Posen had voted for more QE at their last meeting, which would be seen as a counterbalance to policymaker Andrew Sentance, who has voted for a rate increase since June.
“The comprehensive spending review could increase speculation of more QE in the UK, and the BoE minutes could see a move towards the dovish camp, which will put sterling under pressure,” said BNP Paribas’ Ian Stannard.
The government will need an injection of capital from somewhere and if their cut backs force the economy onto the ropes then they could rely on an artificial boost from further easing measures.
Currency markets could receive a preliminary boost from the BoE Governor Mervyn King when he addresses a conference tomorrow evening after a three-day visit by the Monetary Policy Committee to the West Midlands and Oxfordshire in the third annual tour of the regions.
Mr King and seven of his rate-setting colleagues will meet with around 40 companies and business groups during the trip to see how economic conditions are affecting business.
Sterling fell to new lows this morning against the dollar and euro after UK factory orders posted a lower than expected reading in last month. The export led recovery is grinding to a halt and the UK will be looking for other avenues of revenue in the future.
The Confederation of British Industry survey’s total order book balance dropped to -28 this month from -17 in September, below expectations for a reading of -19.
Sterling fell more than 30 pips to a session low of 1.5773 GBP/USD and has continued to lose value into this afternoon. The euro has extended its gains to hit the day’s high of 88.25 pence. The pound rests now dangerously close to a trend-line support which has held since 2008. A break below this level could signal some significant exchange rate losses over the next few months.
Currency markets are awaiting the austerity measures and the bank of England minutes scheduled for release tomorrow. Clients with buying requirements should protect their purchases with stop orders to mitigate any losses.
