Pound falls again after poor economic forecasts

Good Morning. The pound fell yet again yesterday, after reports from both the Centre for Economics and Business Research & the British Chambers of Commerce cast doubt on the pace of UK economic recovery. Rates @ 08:30am stand as follows:

  • GBP/EUR 1.0673
  • GBP/USD 1.5766
  • GBP/AUD 1.7412
  • GBP/NZD 2.1395
  • GBP/CAD 1.6332
  • GBP/JPY 141.93
  • GBP/CHF 1.6191
  • GBP/ZAR 11.588

Why has the pound fallen again?
As mentioned above, it’s the two reports that cast doubt on the UK economy. As this is the main news of the week so far, we’ll look at each report in detail.

Centre for Economics and Business Research
UK interest rates will stay low for years amid tax rises and spending cuts, according to an economic forecast by the CEBR. They believe the rate will remain at its current 0.5% level until 2011 and not reach 2% until 2014.

The report also predicted Sterling will weaken further, falling to $1.40 against the USD and “possibly” below 1 euro to the pound. Its forecast is based on the government managing to slash the UK budget deficit by £100bn over the next parliament, which is a big ask. It says that about £80bn of this would come from spending cuts, and a further £20bn from tax rises.

The reason this weakened the pound, is that with our interest rates low, while other zones increase their rate, investors will get more return from other currencies. This drives investment away from Sterling, causes weakness in the currency and the net result being lower exchange rates.

The British Chambers of Commerce
They have said that business confidence was improving but the economy was still “frail”.
Official GDP figures are due next week, and if they show no growth, it will be the first time the UK has endured six successive quarters without growth. Last week, the National Institute of Economic and Social Research also estimated that the economy did not grow in the June to September quarter. This compounded Sterlings problems, and rates dropped as a result.

Todays Data
Last night we had the RICS house price data which shows the strength of the UK housing market. The figure was +22% against a forecast of +15%. The figures were much better than expected, but due to the overall negative sentiment towards Sterling, it made little to no impact on exchange rates, with this mornings rates actually slightly below yesterdays closing prices.

Today, we have consumer price index, retail sales, and housing data for the UK:
Aus – NAB Business Confidence
UK – Consumer Price Index
UK – Retail Price Index
UK – DCLG House Price Index
US – Consumer Confidence

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