Uk to exit recession today? What does this mean for exchange rates?

Good Morning. Sterling had a good run yesterday, as investors looked ahead to UK gross domestic product data for the fourth quarter due today, which is expected to confirm that the UK is out of recession.

Gross Domestic Product
The Gross Domestic Product (GDP) figures are released at 09:30am this morning. What exactly is GDP? Quite simply, if the GDP measure is up on the previous three months, the economy is growing. If it is negative it is contracting. You can read a BBC article about GDP here.

Figures due out later are expected to confirm that the UK came out of recession in the final quarter of 2009. The economy has contracted for a record six consecutive quarters, but signs of recovery have started to emerge.

Last week, it was revealed that unemployment in the UK fell for the first time in 18 months.
The UK is one of the last major economies still in recession. Europe’s two biggest economies (Germany & France) came out of it last summer, so we have been lagging behind.

However, market participants remained wary about the possibility of a softer-than-expected reading, particularly after figures on Friday showed retail sales rose much less than forecast in December.

What does this mean for Sterling exchange rates?
The expected end to the recession is what has caused the pound to rally in the last 24 hours. If it is confirmed we’re not in recession any more, then we may see further Sterling strength. However, given that this is widely forecast, and already priced into Sterlings value to a certain extent, I’m not sure how much of an effect it will really have.

Regardless of how the economy performs in the fourth quarter and regardless whether we are out of recession or not, growth in 2010 will face headwinds from an increase in VAT, the need for dramatic fiscal tightening at some point after the election. No party has yet given any clear plan on how our huge levels of debt will be repaid.

So, we may well see gains today, however it is unlikely to be the catalyst to Sterling recovery some are hoping. At best I think a short term spike will be the result, and markets will then refocus on new events and other economic indicators.

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