Thursday 23rd February 2012
Good morning. The Pound fell across the board yesterday, so the recent peaks are over for now. It was due to the Bank of England minutes, which most analysts, myself included, thought would actually strengthen the Pound due to better data of late. It actually showed the uncertainty over how much QE to pump in to the economy, and this caused Sterling to fall as the charts below show.
~Currency Movements on Wednesday 22nd February 2012~
Bank of England minutes causes Sterling to fall
Yesterday we saw the most recent Bank of England minutes to the decision two weeks ago to hold interest rates, and pump £50bn into the economy through Quantitative Easing. In the minutes it was revealed that 2 members of the Bank of England's Monetary Policy Committee (MPC) wanted even more money pumped into the economy than the £50bn that was agreed earlier this month.
Two of the MPC members voted for a £75bn stimulus to the economy in February, but the other seven disagreed. The majority considered that £50bn would be enough, with some saying no further action was needed.
So why did this cause the Pound to fall? Most analysts including myself thought the minutes would show a unanimous agreement for the £50bn agreed, and coupled with recent good data this had reduced the chance of further stimulus. That's why the Pound had gained well in recent weeks. Because the minutes showed a lack of consensus, it leaves the door open for even more QE in the future, which has weakened the Pound as it would flood the market with currency, thus devaluing it.
So like many in the market, I had expected the minutes to close the door on further QE, but that in fact they left open the possibility for more.
Traders said some in the market had positioned for the risk of one or two policymakers voting for no QE at all after this month's BoE inflation report predicted the economy would improve, dampening expectations of further stimulus. So as the opposite has happened, exchange rates have corrected accordingly.
Today's Data
Today in the UK we see the latest mortgage approval numbers showing the health of the housing market. There is also a UK Industrial Trend Survey. In the Eurozone there are some German Confidence measures. Stateside we have Housing Prices and Jobless claims.
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