Central Bank Boosts the Pound

Great news for once for US dollar buyers as the pound reaches a nine month high against the dollar.

Sterling benefitted on Thursday after the Bank of England kept interest rates and its asset-buying programme on hold following signs the UK economic recovery is on track.

The decision from the Bank’s Monetary Policy Committee contrasted with the Federal Reserve’s move on Wednesday to buy a further $600 Billion in US government bonds to tackle unemployment and stimulate growth – essentially their version of Quantitative Easing.

This contrast led to the markets gaining by nearly 2% on the day and touching, at the highest price, $1.63 versus the pound and $1.4282 against the euro.

Sterling’s good day was made better when the Bank of England decided to ignore one policy member’s opinion from last month – Adam Posen and decided to keep QE on hold.

A no-change decision that was widely expected helped sterling, and this after recent strong UK gross domestic managers’ surveys on manufacturing and services sector activity has made the outlook for the UK economy look decidedly rosier.

We have of course been here before, and often when the going is good for sterling we come across something that knocks the pound off its self-made pedestal.

Against other currencies yesterday sterling also moved well up from where we have been over the last week, with £-€ trading up at 1.1490 at the high.

Earlier data showing British house prices rose three times faster than expected in October also helped buoy sterling sentiment, though other figures showed a steep drop in UK car sales.

On the continent the European Central Bank again left its interest rates on hold at 1%, the same level it has been at since May 2009. It continued to give the impression that rates will not be increased any time soon.

Despite the fact that Q2 GDP data surprised on the upside and recent data show the underlying momentum of the recovery remains positive in the euro-zone, the ECB still sees continuing uncertainty about the economic outlook and view risks as the remaining slightly tilted to the downside.

This suggests that even though the economy has performed better than expected this year, interest rates are likely to remain low for some timer yet.