Pound falls on revised UK growth figures

Thursday 29th March 2012
Good morning. It was a glorious day with unbroken sunshine across the UK yesterday, however the sun was not shining on the Pound, which took a drop against other currencies. So why did Sterling fall during trading yesterday? It dropped to a 2 week low against the Euro and also dropping from it’s recent highs against the US Dollar. This was due to data unexpectedly showed the UK economy contracted more than previously thought in the fourth quarter of last year. In today’s post we’ll look at this and how it affects the Euro Rate forecast going forwards.

Sterling falls on growth figures

Figures released yesterday morning showed that UK gross domestic product contracted by 0.3 % in the last 3 months of 2011, which was worse than the forecast for an unrevised 0.2% fall on the quarter.

What does this mean for exchange rates?

It means there is a small risk of the UK going back into recession, and this has weakened the Pound. We’ve now had one quarter of negative growth of -0.3%. If figures next month show the first 3 months of 2012 also had a contraction, then it’s the technical definition of a recession.

While this is unlikely as forecasts suggest growth so far in 2012, it did hurt the Pound, especially as it comes days after Bank of England Governor Mervyn King warned the challenges facing the UK economy, and saying that Britain faces a long road back to economic growth.

As you can see in the charts showing yesterdays GBP/EUR and GBP/USD movements, the figures pushed Sterling lower and pulled exchange rates down.

My view is that this is probably a temporary dip. With focus on the Eurozone debt crisis, this blip for the UK will be largely overshadowed, however it may mean that any decent recovery for the Pound will now be limited. Rates for Euros dropped into the low €1.19’s yesterday, but remained within my predicted 1.19 to 1.20 range for GBP/EUR rates. The Euro debt crisis will likely keep Pound/Euro supported, but I don’t expect it to get significantly above €1.20.

Indeed as I outlined in yesterdays post, historically over the last few years rates of €1.20 have been short lived, and are often following by a significant fall in Pound/Euro buying levels. If I had Euros to buy, I would probably look to secure rates while they are close to 18 month highs, especially given the global financial volatility at the moment.

What do other analysts say?

“There is a degree of consolidation in sterling after the sell-off of the dollar,” said Derek Halpenny, currency strategist at BTMU.However, he argued the fundamental outlook was not too negative for the pound.

“There are some positives for sterling relative to the euro (due to problems in Europe) and even relative to cyclical currencies like the Australian and New Zealand dollar from a valuation perspective.”

Elswhere Peter Dixon at Commerzbank said “What does it mean? Probably not a lot. But it kind of makes the starting point for 2012 that little bit more difficult,”. I agree with him comments.

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