MPC member David Blanchflower reiterated the impending possibilities of QE extension, saying that the Bank of England could pull out as much as GBP250 billion from the current GBP175 billion.

Despite the gloom, the pound surprised everyone rallying against all major currencies bar the yen. Sterling maintained a five-day winning streak against the euro and kept cable at 1.64 against the US dollar on Thursday. Friday saw the charge continue, as UK currency hit a six-week high against the euro at GBP/EUR1.115, helped along by the highest UK mortgage data the UK has seen in 18 months. UK residential investment also jumped 23% midweek, contributing to GDP for the first time since 2005.

A successful week for sterling suggested that the worst could be behind the UK economy, however some forecasts suggest GBP could again have a tough week. All will be revealed after the BoE meeting on Thursday, with a decision on QE expected to be announced around midday.

The real drivers for both UK consumer spending and residential investment were actually the hefty government stimulus packages from across the pond, totaling some USD1.7 trillion, the Cash for Clunkers initiative certainly played its part. In the US last week, figures showed that business inventories declined at a slower pace this quarter falling by USD131 billion compared to 160 billion in the last quarter. In another report, weekly jobless claims fell by a modest 1,000 last week to 530,000, which, although heartening, didn’t promise much for the Non Farm Payrolls data due this week.

Markets were illuminated by all the encouraging US data and equity and commodity prices responded well as risk aversion abated. Yet none of this was of any benefit to the dollar which was, as a result, sold widely.

Monday had seen US currency drop to a 14-month low against the euro, following a Chinese report which said Beijing should increase its holdings of euros and yen in its foreign reserves. The following day saw the dollar hit its highest in a month against Japanese currency, touching 92.33 yen and by Wednesday weak US data and volatilities in the equity market paved the way for a flight to the greenback which kept getting stronger. This all came about due to fears that an economic recovery would take longer than previously expected, pulling investors away from the higher yielding currencies and boosting the dollar in the markets. The greenback’s climb gently eased towards the end of the week as investors waited on announcements of more US data. 

The euro began the week trading past USD1.50 for the first time in 14 months after a Chinese report prompted investors to sell the dollar for the single currency. However, later on Monday the European currency experienced its steepest fall since early August, dropping nearly 1%. Meanwhile, the dollar index posted its best daily gain since September as investors unwound short dollar positions after a sudden fall in stocks and commodities. Thursday brought more misery on the single currency as it entered a fourth straight day of losses against sterling to trade at EUR/GBP 0.89.
 

There were various movements in other parts of the world on Friday as the yen strengthened following the year's biggest first-day launch for a single series of Japanese mutual bonds. Both the Australian and New Zealand dollar fell against the yen and were also weaker against the US dollar trading at AUD0.914 and NZD0.729 respectively.

On the same day Canada’s dollar emerged from a three-week low against its US counterpart, strengthening 1.3% to CAD1.067. This week all eyes will be on the Bank of England meeting, which will surely see a wave of activity depending on what is decided with regard to QE.

Nigel Hodges (Currency Solutions).