The Pound remained on the front foot against the Euro yesterday, ahead of the EU Summit today and reports that Britain had rejected the treaty. The decline in risk appetite meant the Pound declined back towards near-term support in the region of 1.5550 versus the U.S Dollar, but the UK currency made widespread gains versus the higher-yielding currencies like the Australian Dollar and the South African Rand.
There was no surprise for the Bank of England yesterday, as interest rates were left unchanged at 0.5%, while the quantitative easing plan was also unchanged at £275 billion. As usual with a no policy change, there was no MPC statement and we'll have to wait for the minutes of the meeting later this month to gauge the voting pattern.
The Pound edged higher following the decision and pushed to highs above 1.5750 against the Dollar before retreating sharply, as risk sentiment declined. The UK currency was undermined by the general flow of funds into the Dollar with lows near 1.56, as it held firm against the Euro. There will be speculation of political isolation surrounding the EU summit and, much more damagingly, there will be fears that the UK economy will be vulnerable to any possibility of a Euro-zone break-up.
Safe haven demand for Sterling will continue to be a key factor and there will be expectations of further defensive inflows, despite fears over the UK economic outlook. The principal feature is likely to be a sustained increase in volatility. The European Central Bank cut interest rates yesterday ahead of the EU summit, which could determine if any of the region's members can keep a top credit rating with Standard & Poor's.
Although the Bank of England is reluctant to extend quantitative easing measures until the current round of purchases have been completed, King introduced a new sterling liquidity measure this week to help banks weather any further escalation of the sovereign debt crisis. The Pound and the Euro fell against the Dollar, after the ECB President Mario Draghi dampened speculation that the Central Bank would buy more bonds to fight the debt crisis.
Bank of England policy maker Martin Weale said on November 25th that there's a strong case for further QE in the future and Paul Fisher also conceded that more stimulus may be needed. The National Institute of Economic and Social Research said yesterday that UK economic growth slowed to 0.3% in the three months through November, increasing fears of a recession.
