Taking a Look at the MPC Minutes and Their Implications

ForexNewsNow | Published on October 20, 2010 at 5:17 pm

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bank of england gbpNEW YORK (Forex News Now) – Investors were given plenty of fodder for GBP/USD analysis today with the release of the minutes from the latest meeting of the Monetary Policy Committee – the component of the Bank of England that addresses monetary policy for the pound sterling.

In the announcement, the MPC revealed that it was split three ways on a proposition to maintain the current rate at 0.5% and “maintain the stock of asset purchases…at 200 billion pounds.” Most members of the committee voted for no change in the currency policy, with two members voting against.

One member – Adam Posen – voted for a 50 billion pound increase in quantitative easing.  He was the only member to advocate further QE.

Another member voted in favor of withdrawing some of the funds used currently in the stimulus program and raising the interest rate by 0.25%.

In light of the split decision, Mervyn King, the governor of the Bank of England, stated that “we won’t make our decision until the day of the next meeting,” to be held in November.  King has been on record lately as being in favor of further asset purchases by the Bank of England, a move that would more than likely send the pound down against the dollar and euro.

In response to the news, the pound rose by 0.92% against the dollar to 1.5839, due in part to the maintaining of the status quo by the Bank of England but also in part to the report released today stating that the Federal Reserve will purchase $500 billion worth of securities to prop up the American economy.

The immediate implication of the MPC’s meeting is that the ongoing trend in GBP/USD will more than likely continue until at least November, meaning that the pound should continue to rise against the dollar.  The pound has gained considerably against the dollar since the lows in May of this year and is set to continue this increase.

There are two main variables at stake when it comes to GBP/USD analysis.  The first is the effect on the dollar of the Federal Reserve’s QE plans.  $500 billion worth of purchases, if accurate, is still well below the projected $1 trillion amount from most analysts, and could actually cause upward pressure in the dollar.

The second variable is if the Bank of England decides on additional QE around the same time – early November – as the Fed.  If so, it is likely that the pound could either stagnate against the dollar or drop in value, especially if the dollar improves.

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