Sterling gains as Bank’s minutes highlight currency impact of monetary policy

The Pound gained across the board on Wednesday morning following the release of the minutes of the Bank of England's meeting this month which showed that the vote on additional quantitative easing remained three members against six. It jumped by 0.5% against both the Dollar and the Euro as some forecasters were expecting that it may have been a closer vote. Some of the members even commented on the impact that more Q.E. could have on the value the Pound and the implications on inflation due to a weaker currency.
 
Sterling was close to its strongest level in five weeks versus the euro after Cyprus's parliament voted down a proposed levy on bank deposits in a vote yesterday afternoon; the first country to reject a condition of financial support. There will need to be further negotiations over the amount, or how Cyprus is expected to raise as its contribution of €6bn required to recapitalise its bank and quickly. Due to fears over a flight of capital from the nation's banks, the government has kept them closed until the decision is reached, and any legislation necessary is approved by parliament. The size of Cyprus' economy and offer of support from ECB in the form of liquidity have so far prevented the markets from outright panic with borrowing costs for both Italy and Spain showing little reaction.
 
The MPC seem to be much more concerned with inflation this year than in previous years which we suspect is largely due to the majority of Britons being fed up with seeing their earnings being squeezed or their savings depleted in real terms. Whilst it's typically the government who you would associate with needing to keep the public happy, George Osborne and Mervyn King have created a joint image of managing the economy and perhaps this is part of the reason for the shift of focus. The bank's stance is certainly becoming more supportive of a stronger currency following King's comments on the Pound last week. We wouldn't be surprised if they now feel the benefits to manufacturing of a weaker currency are outweighed by the impact on the domestic economy of higher inflation. At the same time as the release of the minutes, the number of people claiming unemployment benefits declined by less than expected but the total number claiming is now the lowest since June 2011.

By Andy Scott, premier account manager at corporate premier services at foreign currency exchange brokers HiFX.co.uk.