Apparently, sterling has fallen on the back of zero QE news from Mervyn King at parliament’s Treasury Committee this morning.
The policy of quantitative easing – whereby the central bank increases its credit balance and buys assets – finished in early February. But its resumption was never ruled out. Time and again, Mr King has said the policy would be reinstated if needed.
Chris attended the meeting this morning, and said the tone and comments of MPC members were so similar to previous statements that he glazed over. “We stand ready to do whatever seems appropriate… [More QE may be needed.] We’ll have to see how things pan out… This is a decision we look at month by month,” said Mr King, reiterating that the MPC intend to use QE flexibly. Certainly not news.
Mr King did state fears for the eurozone and the state of UK trade: “My particular concerns at present derive from the state of the world economy and our largest trading partner, the euro area. Despite the depreciation of sterling we haven’t so far seen much evidence of a pick up in net trade in the UK, which is an important part of our rebalancing.” Again, this is not news.
Sterling jitters may be explained by other factors. First, traders may be seeking a quick profit, shorting the pound only to buy it back tomorrow. Second, they may be generally nervous about the UK recovery, and looking out for bad news. Perhaps a piece of bad news today carries more weight than the same piece of news did a few months ago (traders’ sensitivity to bad news… is there a greek for that?).
Related to this, perhaps traders believe sterling is overvalued. This would explain increased sensitivity. Day traders aren’t going to profit from shorting sterling every day, even if they think it is overvalued. If you have a time horizon of just a day, you play along with prevailing market levels, and just keep very alert to the imminent correction.
Related stories – The history of the bank’s communications on QE