Â·Bank of England should continue to purchase gilts
Whereas the upbeat quarterly figures are sparking fresh
waves of speculation on US stock markets in particular, they have had little
impact on the forex markets so far. Although favourable equity markets usually
tend to boost EUR-USD, the forex market has just been treading water: EURUSD started
the week at 1.42, and briefly touched 1.43, only to come under pressure on Wednesday, dropping to almost 1.40. This movement was
presumably triggered by the Chinese stock market plunge after reports (which have since been
denied) that China could be set to tighten monetary policy. This made little
impression on US and European stock markets, which began to soar in the second half of the week. As a result,
EUR-USD strengthened slightly to 1.41,
but ended the week lower than at the end of last week.
The markets are probably waiting for the spate of US data
due to be released shortly. The advance
GDP figures for Q2 will be published this Friday. The
economy does not appear to have contracted nearly as much as in catastrophic
Q1. It is uncertain, however, whether the figures have improved sufficiently to
be regarded as a real turning point. Next week, further important US indicators are on the agenda, including the ISM indices and
the labour market data. Here too, market participants are for the most part
expecting positive results, but only to the extent that the pace of decline could
have slowed down. In our view, the slower pace of decline is not enough to
justify breaking out of the trading range of the past weeks.
Next Thursday both the ECB Governing Council and the Bank of
England Monetary Policy Committee are holding their monthly meetings. The ECB
Councilâ€™s policy stance is not likely to havechanged much since the last
meeting. We are still expecting it to see growth and price risks as balanced: given
the current Eurostat figures â€“ the inflation rate has fallen to â€“0.6% in July â€“
the pace of inflation could turn out to be somewhat lower than forecast in the
last projections. Furthermore, monetary development, particularly dwindling
lending activity, proves that there are no concrete price risks in the medium
term. It looks as though GDP will turn out to be more or less as projected in
June; however, in the meantime, the global economic climate has become slightly
less hostile. On the whole, the ECB is unlikely to change its assessment of the
The Bank of England is faced with more challenging choices.
These do not involve the interest
rate decision. Changing the bank rate is not on the agenda
for the time being. However, the BoE
has now exhausted its financial resources for the purchase
of government bonds, Â£125bn. The
MPC will have to decide on Thursday whether to stock up the
programme to Â£150bn. The targeted purchase of government bonds which was
started in March, was the most important element of the BoEâ€™s quantitative
easing measures. If the BoE decides not to continue with it, the market would probably
interpret this as an initial exit step, i.e. as a positive sign as to the state
of the UK economy. This would presumably boost the pound, at least
We see a good chance of the BoE continuing with the
programme â€“ perhaps on an extended timescale. At â€“0.8% quarter-on-quarter,
growth in the second quarter was disappointing. The year-on-year decline of â€“5.6%
illustrates the extent of the collapse. The housing market is just beginning to
bottom out, and credit flow is amere trickle. All in all, the UK economy is still so fragile that a continuation of the
purchasing programme would be justified.
Rieke +49 69 718-4114
Grabbe / Klaus NÃ¤fken
report has been prepared by BHF-BANK Aktiengesellschaft on behalf of itself and
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