Pound close to 10 month high against the euro

The pound rose sharply yesterday afternoon against the single currency.

Yesterday morning, the minutes of the last Bank of England (BoE) Monetary Policy Committee (MPC) meeting from 6/7 November were published and showed a unanimous vote to maintain the Bank base rate and the stock of asset purchases unchanged at 0.5% and £375 billion respectively.

The concluding paragraph of the minutes made reference to the “uncertainties over the durability of the recovery” and the emphasis put on medium-term inflation expectations remaining sufficiently well anchored. The MPC further indicated that there could be a case for not raising the Bank base rate immediately when the 7% unemployment threshold was reached stating that “Once unemployment had reached 7%, the Committee would reassess what it had learned about the nature of the recovery.”

The pound rose gently on the news but then rose sharply in the afternoon against the euro after Bloomberg run a story reporting that the European Central Bank (ECB) may cut the deposit interest rate it pays commercial banks in the euro zone for overnight deposits made with them into negative territory if more monetary easing is needed.

The report indicated that the ECB is considering a smaller-than-normal cut in the deposit rate if it is taken into negative territory for the first time in the hope that the measure would encourage commercial banks to lend instead of hoarding the cash and thus stimulate economic activity in the euro zone. This is something that the Swedish central bank did in 2008 with great success.

The US dollar also enjoyed a late rally on Wednesday night after the publication of the minutes from the Federal Reserve's last meeting indicated that the tapering of its $85 billion a month quantitative easing program could start as early as next month. The minutes said: "many voting members stressed that if economic conditions warranted, the [FOMC] could decide to slow the pace of purchases at one of its next few meetings."

The minutes seem to show the FOMC is still trying to fine tune their exact strategy for the beginning of an exit strategy from their quantitative easing program.

The minutes state that “many voting members stressed that if economic conditions warranted, the [FOMC] could decide to slow the pace of purchases at one of its next few meetings.”

Paul Ashworth of Capital Economics commented that “Admittedly, that could mean January or March next year as well rather than this December. But remember these minutes predate the much more upbeat labour market figures for October. When this meeting took place, the average gain in monthly payrolls over the most recent three months was estimated to have been 143,000. After October's figures, which included some sharp upward revisions, the corresponding figure jumped to 202,000. Another set of strong payroll figures in November might just be enough to persuade the Fed to begin reducing its asset purchases in December”.