British pound sterling: Currency still in favour as BoE appears hesitatant at thought of cutting the base rate to 0 pct

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Published on Wednesday, 27 June 2012 09:43

Written by Sam Coventry

"The Pound surged to the highest level in almost a month against the Euro, while the UK currency also recovered above 1.56 versus the U.S Dollar" - Adam Solomon at TorFX.

The pound sterling (Currency:GBP) is still sitting pretty on the currency markets this morning - FX markets are showing little movement allowing the UK currency to hold onto yesterday's gains.

The pound euro exchange rate is 0.1 pct down on the day at 1.2506. (Please see our IMT site for the latest pound euro FX forecasts, access issued via this Facebook entrance path).



The pound dollar exchange rate is 0.13 pct down at 1.5624. The pound Australian dollar exchange rate is 0.02 pct down at 1.5545.

The pound found support over the past 24 hours after it was indicated that the Bank of England would hesitate at cutting the base rate to 0 pct. Combine this with indications that traders have all but factored in a coming expansion to the quantitative easing programme and we have a currency that has lost a great deal of sensitivity to the central bank.

Yesterday we saw members of the BoE give their testimonies to the Treasury Select Committee, providing an overview of their thoughts on the UK’s monetary policy.

Governor King said that the ECTR should provide the UK banking system with reassurance and reported that banks have pre-positioned large amounts of collateral with the BoE’s discount window facility.

King added that the BoE has not rejected the possibility of cutting the bank rate further. However, he said to do so would make smaller building societies vulnerable.

"As such, the arguments against going below 0.50% still apply. King also noted that a small cut in the bank rate would not have much impact on the economy and bond purchases can still provide a much larger stimulus. This remains our base case for the BoE," says a currency note from UBS.

Yesterday, "the Pound surged to the highest level in almost a month against the Euro, while the UK currency also recovered above 1.56 versus the U.S Dollar, amid widespread speculation that the EU summit this week won’t result in any cohesive measures to try and bring about a resolution to the sovereign debt crisis," says Adam Solomon at TorFX.

The uncertainty in the Euro-zone combined with rising bond yields in Italy and Spain has seen investors flock to the relative security of the U.S Dollar and the Yen with the Euro struggling to stem the losses.