The chances of further QE were seen to have greatly increased yesterday as the Bank of England minutes revealed an unexpectedly close policy decision in June with a 5-4 split in voting (versus 8-1 the month previous) as central bank Governor Meryvn King joined Adam Posen and David Miles in calling for an injection of an extra £50 billion in QE, whilst Paul Fisher called for a further £25 billion in stimulus.
The growing case for more QE was bolstered further by some shaky employment numbers which continued to highlight the softness of the UK labour market. GBP/USD spiked to a low of 1.5650 as investors digested the dovish minutes although the move lower was short lived with the market already prepared for such an outcome after King’s cautious Mansion House speech last Friday and cable soon traded to a high of 1.5777 as USD selling prevailed in anticipation of the FOMC decision later in the day.
The Fed’s decision to extend Operation Twist until the end of this year, as was widely anticipated by most market participants, saw an initial rally in the greenback, however this move was quickly reversed but losses in the USD were limited with the Fed stopping short of announcing more aggressive measures such as outright treasury buying, or QE3. UK economic data today includes May retail sales numbers, with analysts looking for Jubilee-inspired bounce higher after April’s abysmal figure and this should offer some near-term support to GBP. The US data docket includes existing home sales and June’s Philadelphia Fed survey, but we expect that relative monetary policy expectations will continue to drive price action in GBP/USD today. GBP/USD opens this morning at 1.5678.