February 13 Wednesday
The euro made modest gains in Europe moving to 1.3495 from 1.3439 (+56 pips) against the dollar. The euro’s impetus mostly came from the weaker yen and sterling as the UK currency fell against most of its counterparties. Euro-sterling rose sharply to 0.8683 from 0.8570 (+113 pips), while Euro-yen rose 152 pips to 126.42 from 124.90.
The pound continued to weaken across-the-board to a 15-month low of 1.5540 following the Bank of England’s quarterly Inflation report and Mervyn King’s downbeat comments.
The Bank of England’s MPC board has significantly raised its inflation forecast, placing CPI above its 2.0% target at 2.3% in two years time stemming from a weaker sterling and the increased price of energy. They warned that weak productivity is boosting domestic cost pressures.
The MPC said its best collective judgment of the UK economy is that it will see a sustained but slow recovery, weak by historical standards, mirroring the subdued prospects for global demand and the supply capacity of domestic activity.
Bank of England Governor Mervyn King said “We must recognize, however, that there are limits to what can be achieved via general monetary stimulus – in any form – on its own.” King also told reporters that the BOE should not risk tightening monetary policy, even as it pushed back its expectation for when inflation would return to its target to early 2016, because the economy remained weak.
Sterling plummeted 120 points to 1.5540 from 1.5660 following the BOE Inflation report and weakened further following Mervyn King’s comments.
The Japanese yen fell against most of its counterparties after the Bank of England Governor Mervyn King said currencies should be allowed to fluctuate based on monetary stimulus measures.
Mervyn King said “When countries take measures to use monetary stimulus to support growth in their economy, then there will be exchange rate consequences and they should be allowed to flow through. It is very important to allow exchange rates to move.”
Dollar-yen rose 87 points to 93.77 from 92.90 while Euro-yen rose 152 pips to 126.42 from 124.90.