GBP Suffered Resulting from BoE Minutes
19/08/09 21:04
The Deparment of Energy's crude oil inventory data
sharply surprised investors as they reported a
drawdown of 8.4 million barrels versus a build of 1.2
million. WTI crude oil jumped on the back of the
report and continued to gain throughout the session,
climbing to $72.20 at the time of writing.
Correlations continue to show an inverse relationship
between the dollar and oil prices but the USDJPY/oil
correlation has noticeably started to shift.
ECB Governing Council member Weber said the surprise expansion of German Q2 GDP occurred largely because of stimulus measures already introduced and the increase may therefore not be sustainable. He warned that the German economy is likely to recover only slowly with GDP growth unlikely to reach levels seen in 2008 until 2013. Weber's comments echo ZEW president Franz who said, "There is, however, no reason for euphoria. The German economy develops parallel to the world economy and should, hence, recover only gradually." 3mo view EUR/USD 1.30
ECB Governing Council member Weber said the surprise expansion of German Q2 GDP occurred largely because of stimulus measures already introduced and the increase may therefore not be sustainable. He warned that the German economy is likely to recover only slowly with GDP growth unlikely to reach levels seen in 2008 until 2013. Weber's comments echo ZEW president Franz who said, "There is, however, no reason for euphoria. The German economy develops parallel to the world economy and should, hence, recover only gradually." 3mo view EUR/USD 1.30
GBP suffered resulting from the BoE minutes which showed a 6-3 vote regarding raising the amount of asset purchases, with the three dissenters, including Governor King, voting for a £75 bn increase versus the £50 bn that was agreed upon. The tone of the minutes was consistent with the conclusions of the latest Quarterly Inflation Report and officials noted that although Q2 GDP had been weaker than forecast, output seemed to have since stabilised. The minutes also revealed that, "The potential adverse consequences of adding another large monetary stimulus might be less severe than the possible costs of acting too cautiously." Given that the current limit of asset purchases will likely be met in November, this is consistent with the UBS view that a further increase of £25 bn could be in the cards. Such action is GBP negative, and moreso in a risk averse environment where USD can strengthen.
Opposition leader David Cameron warned that high borrowing levels put the UK at risk of default. While government finances remain a concern, default warnings are more politically motivated ahead of the general elections and hold little ground in the real market.
For now, we still look for further GBP underperformance going forward with the BoE arguably at the most dovish end of the G10 central bank spectrum as BoE continues to search for a bottom with QE.
Ref: UBS, Reuters