The Bank of England seemed less concerned with the global economy and more with the domestic economy, particularly when it comes to wage and price growth. The only mention of the international situation was that “...   

However, when it came to the domestic economy, the BOE made perfectly clear4 that “... Given these considerations, the MPC intends to set monetary policy to ensure that growth is sufficient to absorb remaining spare capacity in a manner that returns inflation to the target in around two years and keeps it there in the absence of further shocks...”  That seems to indicate that the BOE is connecting ‘remaining spare capacity’ with the complete lack of pricing pressure. 

The ECB has made clear through its policy statement that ratcheting up of easing is required, and more may be necessary. The BOE has made clear that although well short of target, growth is presently sufficient enough not to warrant any change of course. It would then it would seem that the Pound Sterling would be gaining vs the Euro, but clearly that is not the case. In fact, with few exceptions the Euro is gaining on most majors, including GBP and USD, but not against the Japanese Yen.

The Euro accounts for over 37% of the IMF5 special drawing rights (SDR)6 basket, second only to the US, at 41.9%. Following the Euro the Yuan accounts for 11.3%. The Yuan is followed by the Japanese Yen at 8.33% of the SDR basket value.

It has been widely reported that China’s foreign asset reserves declined far more than first estimated7 in 2015. However, it’s difficult to determine accurately what particular assets China has sold in order to stabilize its restructuring economy. Is it possible then, that the PBOC is also reallocating its foreign currency reserves? It’s plausible since the Yuan will officially have special drawing rights on 1 October of 2016. The Yuan is positioned between the Euro and Yen in the IMF basket. So true, the PBOC may be selling stronger assets to increase domestic liquidity, but perhaps it may also be contributing to the sudden Euro strength against Sterling.

It should also be noted that Prime Minister David Cameron is hopeful of a ‘February deal’ and that the UK-EU referendum vote would be held soon afterward8. However, the Euro has been gaining on Sterling well before this announcement.

Whatever, the case might be, one thing is certain: unless the global economy completely unravels, the BOE seems willing to be patient as long as unemployment remains low, growth remains positive and CPI remains non-negative. With that in mind, and considering the ECB’s impatience with a too strong Euro, the current trend should not last too long.

Mike Scrive
Technical Analyst
Accendo Markets

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1 HCPI: Harmonized CPI; essentially a statistical smoothing out of the average price of a basket of common consumer goods over the EU28.
2 Eurostat
3 ECB press conference 10-12-2015
4 BOE Monetary Policy Summary
5 IMF: SDR ¶4
6 IMF SDR Fact Sheet, footnote 1; The Yuan will be included 1 October, 2016.
7 Bloomberg 7-1-2016
8 BBC 10-1-2016