BoE's QE Surprise Sends Sterling Lower

NEW YORK ( BBH FX Strategy) - European stocks continue to advance, with EuroStoxx 600 up nearly 2%, led in part by a 3.5% rise in banking shares. S&P 500 index futures, meanwhile, are showing a 0.7% gain in overnight trade, pointing to another strong Wall Street open.

Asian equities have extended gains, with the MSCI Asia Pacific index advancing 3.3%, led by the tech sector on speculation of a merger between two large technology firms.

Investors are hoping for a policy response from the European Central Bank to a surprise announcement of 75 billion pounds additional QE by the Bank of England. The BoE cited strains in the bank funding market as key catalyst for the move, which prompted sterling to plummet nearly 1.2%.

At the same time, EU Commission President Jose Manuel Barroso said today that the commission will propose coordinated action to recapitalize banks and there are reports of a fresh round of stress tests.

There is much speculation that the ECB is likely to provide some form of accommodative policy at its meeting in Berlin today, given the speed at which the eurozone economy has decelerated in the recent months and how inflation is expected to fall as a result.

Elsewhere in the G10 Swiss September CPI came in above expectations at 0.5%, up from 0.2% in August. The Swiss National Bank may take some satisfaction from the rise in inflation as the threat of deflation was one of the central reasons for pegging the CHF, though the rise seems to reflect a change in method. The EUR/CHF has just pushed through its 200-day moving average with many option strikes seen at 1.25.
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