As the probability of another round of UK quantitative easing fade away, the sterling rallied to nine-month highs against the US currency. The decision of the Bank of England to temporarily shelf QE2 has increased the confidence of traders on the forex value of the sterling. Without quantitative easing, the purchasing power of the UK currency will not be eroded.

The September to October figures for the purchasing managers’ index (PMI) have shown that there was a significant improvement in the economy. The PMI is an accurate indicator that accounts for approximately 75% of the British economy. It includes various business sectors, from the smallest to the largest businesses – from personal services (e.g., barber shops) to large banks. The PMI rose from 52.8 for the month of September to 53.2 for the month of October. This development has again disproved the forecasts of analysts and the markets in general.

There are recent figures that are providing optimistic prospects for the British economy. These include the significant and higher-than-expected recovery of the services sector. Meanwhile, the manufacturing sector also showed strong improvements in its third-quarter figures. These domestic figures and other international developments made it less probable for the Bank of England’s monetary policy committee to recommend another round of quantitative easing.

As a direct result of the shelving of the QE2 option (for the moment at least), the foreign exchange value of the sterling has appreciated against the dollar from $1.601 to $1.614. Meanwhile, the sterling also modetly gained strength against the euro from €1.142 to €1.148.

According to Peter Dixon of Commerzbank, the latest economic figures are optimistic enough that it would be somewhat redundant for the Bank of England to try to stimulate the economy by extending its quantitative easing program. There is simply no need to do that in the foreseeable future at least.

Another good economic indicator is the index produced by Markit, a data service provider firm. Based on the latest figures, there are also significant upward pressures that are being exerted on the sector that represent at least 75% of the British economy. Of course, these optimistic figures were one of the main factors that hindered a pro-quantitative easing decision from the monetary policy committee of the Bank of England.

However, the biggest factor that most probably influenced the decision of the MPC was the third-quarter data on the gross domestic products (GDP). The latest GDP figures posted gains that are higher than what was expected by the markets.

Even the lone advocate of QE2 during the last MPC meeting, Adam Posen, thinks that economic stimulus would only be necessary if the economy does not show any improvement. The austerity measures would have worsened the sluggish development but international optimism seems to support the UK economic recovery. On the other hand, there might still be some possibility of quantitative easing by next year if the economy wobbles.