httpvh://www.youtube.com/watch?v=BowO1SgQmUI

The conflicting views of members of the Bank of England’s Monetary Policy Committee over the possibility of further quantitative easing came to the fore yesterday.

Adam Posen, although regarded as a dove, had never made his feelings as clear on the need for further monetary easing as he did in speech in Hull yesterday. He said that more easing should be undertaken to prevent the UK falling into a “lost decade” as Japan did in the 1990s. His comments were met with a determined sell-off in UK assets. although members have said that further measures may be needed, this was the first member of the MPC to actively lobby for them in a speech. GBP lost 0.7% against EUR and 0.6% in the 30mins after the speech before pushing to new 4 month lows against the European single currency.

Andrew Sentance, probably the most hawkish member of the Bank of England’s rate setting panel, was quoted on the wires hours later as saying “There is no need (to restart QE) in my view. I actually think we should be preparing the ground for gradually increasing interest rates in a measured way to reflect the fact that the economy has improved and the inflation situation is not where we would like it to be.” This caused a minor spike in GBP but to no avail and the market continued to press on the pound.

The euro had earlier been supported over rumours that the ECB had bought into an Irish debt auction. There was no comment from the bank.

The biggest loser overnight was the USD as once again data from across the Atlantic showed a significant decline. Consumer confidence dipped to 48.5 and the Richmond Fed fell to -2 from an expected 6. EURUSD moved to a 5 month high while gold made yet another all-time price record on the news however equity markets were also higher. Normally we would expect stocks to fall as a signal of falling economic confidence however the belief that more QE is on the way is buoying prices. To say equities don’t deserve to be where they are is an understatement.

We have long held the view that the October spending review would cause some additional volatility for GBP crosses and we expect that will start soon. Overnight, Defence Secretary Liam Fox has let fly and planned budgetary cuts to his department citing would pose ‘grave consequences’ to the coalition government. We believe this to be a ‘hands off my supper’ exclamation and posturing more than anything particularly fractious. All the same we expect more of this the closer we move to the review (Oct 20)

Data focuses on the mortgage markets in the UK (09.30) and US (12.30) and given the poor state of the housing market in both countries we would expect both to fall. The broad trend for trade will likely be further USD weakness today with cable eyeing up the 1.60 level intently.