Sterling slumps as QE becomes a greater possibility

Sterling's bouyant start to the week came to an abrupt halt yesterday as members of the Bank of England's monetary policy committee disagreed on how to kick-start the UK economy. MPC member Posen was the catalyst for Sterling's slump against most major currencies as he said he supports an expansion of quantitative easing. 

He went on to say "further easing should be undertaken" in the UK "subject to further debate" as signs point to inflation falling well-below target in 2012-13. On the other hand, MPC member Sentance does not believe there is a need to restart quantitative easing as "it would give the wrong impression on the state of the economy".

The damage to Sterling was quiet severe - down 1.6% against the Euro and down 1.3% against both the Australian and New Zealand dollars - even though the UK economy growing at its fastest pace for nine years in the second quarter, up 1.2%.

Despite the prospect of further QE in the UK and US it is difficult to understand the ongoing strength of the Euro considering the poor performance of Greek, Irish, Portugese and Spanish equity markets. We wonder whether the effects of QE have now been priced into the market and that any further Euro strength will be limited.

In the US, consumer confidence dropped to 48.5 in September, which was well-below forecasts of 52.1 while the Richmond Federal Reserve manufacturing PMI fell to -2 in September from +11 in October; a really disappointing number considering forecasts were for a much smaller decline to +6.

It is a light data calendar today with UK personal lending data for August from the Bank of England and consumer and industrial confidence indices for September from the Eurozone.