GBP/USD rebounded this morning, gaining 0.38% to $1.5835, as renewed speculation about the Fed’s asset-purchase programme, dubbed QE2, triggered a broad sell-off in the US dollar. The beleaguered currency weakened today after Federal Reserve officials asked dealers for projections of central-bank asset purchases over the next six months. With QE virtually a sure thing, investors are now questioning whether there will be a finite amount of easing or whether it will be left open-ended, with liquidity being provided when required. Forecasts for the size of QE2 include estimates for $1 trillion by Bank of America-Merrill Lynch and $2 trillion by Goldman Sachs Group, with economists at both firms agreeing the Fed will likely start by announcing $500 billion after its 2-3 Nov meeting. [1] Sterling held onto gains against the dollar following a smaller-than-expected drop in the CBI retail survey, which fell to 36 in October from a six-year high of 49 the prior month. The latest reading compares with Bloomberg’s median expectations for a drop to 35. Against the euro, however, sterling traded around 0.25% lower, following a disappointing house price report from Nationwide. The lender reported a 0.7% drop in UK house prices in October. This is the third month in four that British house prices dropped. Meanwhile, Bank of England policy maker Adam Posen, who in recent monetary policy meetings voted for more quantitative easing, today emphasised that the UK economy remains weak. In an interview with the Times, Adam Posen said that tax increases and spending cuts would have a large impact on the UK economy’s performance, imposing a ‘material down-drag’ on both growth and inflation. Anthony Grech, London

 

Notes: Chart data sourced from Bloomberg. [1] Bloomberg News (28 October 2010).