Sterling's decline against the dollar continued today with little sign of a recovery. This morning saw cable fall to its lowest levels since July 2010 hitting a low of $1.5284 and now means we have lost over 10 points since the start of January. In today's post I will take a closer look at what caused a 1% drop in exchange rates within a matter of hours.
Ever since the turn of the year the UK economy has been in the spotlight and has come under increasing pressure since figures revealed that the UK economy contracted in the final quarter of 2012. The main driving force behind today's losses were down to the release of the Bank of England minutes from their meeting at the start of the month, the minutes showed that policymakers voted 6-3 (compared to 8-1 the previous month) in favour of keeping Quantitative Easing (QE) at it current level of £375 billion.
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What was interesting is that the Governor of the BoE Sir Mervyn King voted in favour of further stimulus but was outvoted by his colleagues, but only just. The recent minutes show that opinion is changing and more negative data this month could prompt further stimulus in the next couple of months.
The BoE may look at further stimulus as early as March in a last ditch attempt to prevent the UK falling into a triple dip recession. Although QE may have a negative impact on the pound short term, if it can prevent the UK from falling into recession it may have a long term benefit if it means the UK can hold onto its AAA credit rating.
One thing is certain and that is the volatility surrounding the currency markets is sure to continue. Lets not forget that the U.S still need to put a permanent solution in place regarding the 'Fiscal Cliff' by the 1st of March, but with the U.S dollar seen as a safe-haven currency, tax increases and spending cuts in the states could actually see the greenback strengthen.
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