TH: Sterling jumps to new 19-month highs against the euro as Bank hints QE is over
The pound jumped by nearly a cent against the euro today to a new 19-month high after the Bank of England appeared to rule out more quantitative easing.
Having already strengthened against the euro over the last week with debt worries flaring up again in the eurozone, sterling hit €1.223 today.
That is not far below the mid-2010 peak of €1.239, beyond which one has to go back to late 2008 to see the pound any stronger versus the euro.
QE increases the supply of sterling and reduces its value.
The pound was initially boosted by Bank deputy governor Paul Tucker's admission that inflation was 'uncomfortably high' and proving stickier than the Bank had forecast.
It then took a greater leap when minutes from the Bank's last monetary policy committee meeting showed QE stalwart Adam Posen had finally dropped his long-standing demands for more stimulus.
'Having expected the voting pattern to match last month's outcome, the markets were surprised by arch-dove Adam Posen's change of heart, voting for no change to the quantitative easing programme," said Alex Lawson, senior broker at Moneycorp.
With the whole MPC suddenly sounding worried about above-target inflation, economists said the prospects for more QE next month - or even in subsequent months - were virtually nil.
James Knightley of ING said upbeat unemployment figures also made more QE unlikely: 'Sterling is rallying on the back of this and we suggest it has further upside, particularly against the euro.
'There are obviously still risks with the BoE minutes suggesting that the UK could return to recession given construction volatility and the effects on data from the Jubilee celebrations and the Olympics.
'Nonetheless, with some encouraging signs on growth it looks as though the BoE will sit on its hands for the next few months.'
Chris Turner, head of currency strategy at ING, reckons sterling is headed for €1.25.
'We have been very positive on sterling all year, but progress to the upside has been frustratingly slow,' he said.
'This probably owes to the UK's status as an old economy undergoing necessary re-balancing towards the external sector - plus an external sector skewed to the eurozone.'
Market players said the euro could post further losses ahead of a Spanish bond auction on Thursday, and any evidence of poor demand and high yields at the auction would aggravate concerns about Spain's fragile fiscal position.
