23rd December 2010
Good morning. Yesterday a downward revision in UK economic growth reminded investors the country’s recovery remains fragile. The revised GDP figures weakened Sterling against the Euro, and hit a 3 month low against the US Dollar. Rates at 08:30am this morning are as follows:
- GBP/EUR 1.1739
- GBP/USD 1.5389
- GBP/AUD 1.5338
- GBP/NZD 2.0636
- GBP/CAD 1.5581
- GBP/CHF 1.4636
- GBP/ZAR 10.395
- GBP/JPY 127.64
- GBP/HUF 322.92
- GBP/DKK 8.7436
- EUR/USD 1.3106
Revised GDP weakens the Pound
The UK economy grew less than previously estimated between July and September, revised figures have shown. The yearly estimate was also cut, with the ONS saying that GDP in the third quarter had grown by 2.7% compared with the same point last year, down from the previous estimate of 2.8%.
Market participants said the pounds losses were exacerbated in holiday thinned markets, and analysts expected further losses would be limited after Bank of England minutes showed growing concerns about inflation risks. Rates fell against the Euro to the low €1.17’s and to a 3 month low vs the US Dollar.
US growth revised up
In contrast to the UK, US growth was revised up and this strengthened the US Dollar making it more expensive to purchase. GBP/USD is now at a 3 month low due to a weak pound and stronger dollar.
Bank of England minutes
The Bank of England’s Monetary Policy Committee (MPC) has split three ways again over interest rates and quantitative easing (QE). Minutes of the MPC’s December meeting showed that one of its nine members again wanted QE to be expanded, while another continued his call for interest rates to rise to 0.75% from 0.5%.
However, eight MPC members voted for both rates and QE to stay unchanged. Rising inflation risk could put pressure on the central bank to tighten monetary policy, which would be supportive for the pound as it boost the yield on UK assets. We don’t expect an interest rate hike for at least 6 months though, so gains for the pound are limited due to this.
China offers to help Eurozone
China has offered its support to eurozone countries to help them through the debt crisis that has gripped the region. “We are ready to support the eurozone to overcome the financial crisis and realise economic recovery,” said foreign ministry spokeswoman Jiang Yu.
She added that the eurozone would become “a major market” for China’s foreign exchange investments. This surprised the markets and has given some support to the beleaguered single currency. The news has strengthened the Euro slightly, helping to push GBP/EUR rates down.
Further GDP figures and Unemployment data from the USA are the main releases today. The only UK data of note is the Index of services, which measures movements in the Gross value added for service industries. It’s quite a minor release but given the thin trade in the run up to Christmas, it may have a bigger impact than usual.
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