The UK currency is somewhat perplexed, having to digest last night’s announcements from both the chancellor and Bank of England governor, together with the possibility of more QE and the latest trade data. On the latter, the April numbers showed the trade deficit at GBP 10.1bln, just shy of the largest in history. More than 70% of this deterioration came from the non-EU balance, so it can’t be blamed on the eurozone crisis. Only exports to South Korea expanded over the month. Exports to China were down 16%, exactly the same as the fall for those to Germany. It’s not a great omen for the second quarter. Following the announcements last night, sterling was pushed lower on the back of the stock market open as bank stocks were boosted by the prospect of more measures to increase liquidity and boost lending. As we mentioned earlier, the announcement on extending 6mth liquidity to banks amounted to turning on the taps of the facility announced back in December. On the Treasury scheme to increase bank lending, we await more details.
What’s interesting is the limited reaction to King’s comment on quantitative easing in which he suggested that “the case for further monetary easing is growing”. For sterling, even if there is further QE, the impact on rates and the real economy is far less certain than was the case with the previous tranches - and even then it was unclear. Therefore, even though sterling is weaker, all things considered it’s a modest reaction but probably the correct one.