GBP recovers despite possibility of UK recession

Friday 30th March 2012
Good morning. Well, what a difference a day makes. After seeing Sterling fall earlier in the week as outlined in my recent post the Pound regained ground against a beleaguered Euro yesterday, however the Pound did fall away from the recent highs against the Dollar. And all of this on the back of a host of poor economic data.

So to end the week, let’s look first at the data we had yesterday, then I’ll explain why the Pound actually gained against the Euro despite this!

Poor UK Data casts shadow over UK economy

Yesterday saw quite a bit of UK economic data that was worse than forecast. Firstly we saw that mortgage approvals fell last month, and money supply for February posted its biggest monthly fall on record. This was followed by figures showing poor growth in Britain’s dominant services sector. We then learned that UK House Prices had their sharpest drop in over 2 years.

Then, to put the icing on the cake of doom the Organisation for Economic Co-operation and Development (OECD) has calculated that the UK economy shrank in the first three months of the year – if true this means we’re back in recession that I also touched on yesterday. You can read more about the OECD figures here on the Telegraphs website. All of the above came just a day after data unexpectedly showed the UK economy had contracted more than previously thought in the fourth quarter of 2011.

So, with all the poor data why did the Pound gain against the Euro?

There was an interesting report on the Reuters website that British electricity supplier International Power had received a proposal from its majority shareholder, French utility GDF Suez, to buy shares it does not hold already.

This basically meant there could be a huge demand for Sterling, and this speculation caused the Pound to gain a little. As the chart shows we saw steady gains throughout the day yesterday.

It was mostly however due to the Euro weakening and becoming cheaper to buy. Italian and Spanish government bond yields rose while Italian credit default swaps also moved higher, reflecting investor worries that the EU debt crisis is ongoing and that Greece may need further funds.

The news weakened the Euro enough to brush of the poor UK data, and that’s why the Pound rose against the Euro yesterday.

Sterling falls against US Dollar

Despite gains made against the single currency, the Pound fell from it’s recent 4 month high against the US Dollar. With the poor UK data and also weakness in the Euro likely to drive investors towards the safe haven US Dollar, I don’t expect rates to break $1.60. If anything I wouldn’t be surprised to see rates fall for GBP/USD this year given the current climate.

Today’s data that might have an effect on exchange rates

There are no UK releases today. To end the week we have German Retail Sales, EU Consumer Confidence. Stateside watch for Personal Consumption Expenditure figures, Inflation data, and a consumer sentiment survey.

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