UK GDP poor, QE in Feb, Pound rises – why?

Thursday 26th January 2012
Good morning. Yesterday GDP figures showed the economy contracted by 0.2% in the last quarter, and in the run up to the release Sterling fell across the board. The minutes to the BoE meeting to discuss QE however revealed all 9 members voted not to increase it, and this then lent some support to the Pound. Concerns about the European Central Bank having to write down its Greek bond holdings as part of a deal to avoid a disorderly default also weighed on the single currency, pushing GBP/EUR rates up.

Today we will look at the GDP and BoE release, analyse why it pushed the Pound up, and take a look at how QE in February may affect Sterling exchange rates. Below you can see the drop in the run up to the data release at 09:30am, and then the recovery after the BoE Minutes:

~Currency Movements on Tuesday 24th January~

UK GDP shows we’re headed to recession

UK economic activity shrank by 0.2% in the last three months of last year according to official figures released yesterday, in the form of GDP. The figures, from the Office for National Statistics (ONS), are a preliminary estimate, which could be revised either up or down by 0.2%. The quarterly fall in GDP is the first since the last three months of 2010, when freezing weather was blamed for a 0.5% drop.

The new figure was worse than had been feared, as most economists had pencilled in a 0.1% fall in activity. It also indicates the UK could head back to recession, defined by 2 consecutive quarters of negative growth.

In the run up to the figures, the Pound dropped significantly, as the market was braced for a possible worse figure. When the actual figure was released, it was only 0.1% worse than forecast, and so the effect on exchange rates was limited. In fact Sterling actually rose against the Euro, but this was due to the BoE minutes, which I’ll cover in the next paragraph.

Bank of England minutes cause Pound to rise, despite more QE on horizon

Bank of England minutes released yesterday morning showed members voted unanimously to keep total asset purchases at 275 billion pounds. However, the minutes also said a further expansion of asset purchasing was “likely” to be required. The fact that no BoE policymakers voted for an increase in QE this month is what caused the Pound to rise after the release.

Many clients were surprised the GBP/EUR rate rose despite worse GDP, but it’s because nobody voted for QE, signalling it’s not quite the certainty that it was. Analysts still think it will happen in February however, and as this has already been widely predicted, the Pound actually gathered a little support.

“If they are saying “likely” in the minutes that pretty much means definitely. That’s a pretty strong word from the MPC who would normally sit on the fence,” said Lee McDarby, head of corporate dealing at Investec Bank PLC.

Although the last round of QE in October did not weigh significantly on sterling, traders said the need for further economic stimulus added to a shaky outlook for the pound.

Concerns about the European Central Bank having to write down its Greek bond holdings as part of a deal to avoid a disorderly default also weighed on the single currency, pushing GBP/EUR rates up.

Today’s Data

Today Germany releases its latest consumer confidence measures. In the USA there is a host of data including Jobless Claims & New Home Sales. New Zealand releases Trade Balance figures in the evening.

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