With the Bank of England officially announcing yesterday it would issue new central bank reserves (money) in order to purchase up to 150 billion pounds of assets, mostly U.K. government bonds (gilts), it seems reasonable to assume there's a potential to see the pound decline sharply.
The bank undertook its quantitative easing program because by itself, the 50 basis point reduction in its main policy rate would still leave a substantial risk of undershooting the 2% CPI inflation target in the medium term, the BoE said in its statement.
In this instance, undershooting the inflation target means the bank is concerned about deflation taking hold.
The Committee also resolved to undertake further monetary actions, with the aim of boosting the supply of money and credit and thus raising the rate of growth of nominal spending,” the statement went on to say.
So with the BoE printing new money in order to raise the supply, and because increased supply tends to drive down price, it seems the bank now wishes to create inflation (in order to combat deflation) by devaluing the currency.
Yesterday's move could just be a first step. Officials said in their statement that they will monitor the effectiveness of this purchase program in boosting the supply of money and credit and in due course raising the rate of growth of nominal spending, adjusting the speed and scale of purchases as appropriate.
In general, the better-yielding currencies (euro, pound, aussie and kiwi) tend to appreciate when U.S. equity markets rise and they fall when stocks are sold. So the question is whether the pound can dis-connect from the equity markets when they have another inevitable bear market rally.
If it can, it could be a signal that the pound can sharply depreciate. And while there's little evidence of the happening yet, it certainly is something which currency traders will want to stay aware of over the coming days and weeks.