FX Market: British Pound Plummets, FX Traders Prefer Australian Dollars

In a surprise move early in the New York morning, members of the Bank of England elected to expand its quantitative easing program following its scheduled interest rate decision. Although there was latent speculation that the measure would surface, for the most part, traders were expecting no real changes to QE with recent pickups in economic data. According to the release this morning, the Bank of England saw it necessary to pump another 50 billion pounds in to the economy to the tune of 175 GBP billion. A good plan to continually increase liquidity and credit in the country, the measure will likely produce more harm than good. As before, the more cash the MPC pumps into the economy, the higher the likelihood that the underlying currency will come under selling pressure. The more pounds that are available in the market, the lower the price will fall. Moreover, the increased supply of cash will likely lead to further inflationary pressures down the road, eroding potential growth in the near term. The sentiment can already be seen in today’s market action as the GBPUSD currency pair lost a whopping 150 pips in a matter of 5 minutes following the announcement. Once trading above the $1.7000 figure, the British pound is now trading about 220 pips lower (as of this writing, the pair is trading at $1.6771). A necessary evil, the chosen expansion will push British leaders of monetary policy to teeter a fine line when it comes to an exit plan.

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Aussie, Aussie, Aussie

On the other side of the world, the Australian dollar received a nice lift on the day. The currency rose to as high as 0.8460 against the US dollar following an employment report that showed actual job growth. Optimistic, the report illustrates a more resilient Aussie economy as most other trading partners have shown continual weakness in labor reports. But job growth alone didn’t help the underlying currency. Traders now looking ahead to a yearend interest rate increase were supporting the Aussie bid as a growing consensus now believes that 25 basis points are in the cards for the overnight cash rate. According to market sentiment, there is now an 80 percent chance that central bankers will opt to raise interest rates in the fourth quarter. And why not? Economic data has been nothing but positive for the land down under. Consumer and business confidence continues to remain relatively supported as retail sales kept a 4-month winning streak going until just recently. The streak ended as sales dropped 1.4 percent in the month of June. As a result, given the recent spark in interest rate speculation, longer term prospects continue to remain optimistic for the underlying Aussie dollar.