SO THE Bank of England voted against further Quantitative Easing and Sir Mervyn King was out voted for the fourth time in his tenure as Governor. All the talk about negative interest rates proved to be nothing more than that, with rates being kept on hold yet again. This surprised those in the market many of whom expected a fresh round of money printing. The Pound was the immediate benefactor, rising by half a cent on the Dollar within minutes of the announcement.
What is next for Sterling?
The Pound has been one of the biggest losers in the currency markets so far this year driven lower by consistently negative data releases from the manufacturing and construction sectors, a credit rating downgrade and expectations for QE. This has been great news for UK exporters who have been significantly more competitive as the Pound has weakened.
For British importers however, it has been a different story. The sudden drop in the value of Sterling saw many caught off guard and unprotected. The speed of the fall was certainly unexpected and many Sterling sellers sat on their hands expecting retracement that never came.
Today’s announcement should give some balance to the equation. One of the drivers of Sterling weakness was the expectation of further QE. Now that this has been put off for at least another month the market – and the Pound – can breathe. This may afford importers the chance to sell Sterling slightly higher up the range in the coming weeks and they would be wise to seize the opportunity.
However, in the next three to four months, the Pound will remain under pressure. Until we see sustained growth in the UK economy there will be little to support the currency. The threat of QE will continue to loom, especially with a new BoE governor taking over in June. The remaining ratings agencies will be scrutinising the AAA rating and investors will be reluctant to hold Sterling.
Exporters should make hay while the sun shines, while importers should be considering hedging measures that protect their budget exchange rates.
Torrie Callander, corporate dealer, at Global Reach Partners