GBPEUR/GBPUSD
The Pound declined against the 16 most actively traded currencies yesterday, falling over 1% versus the Euro, after a report from the Office of National Statistics showed that the UK economy returned to growth by less than economist forecasts. Gross domestic product rose just 0.1% in the fourth quarter, as service industries and manufacturing expanded just enough to pull the economy out of the longest recession on record.
The UK currency also slumped 0.5% against the U.S Dollar, as the data disappointed investors who had anticipated a 0.4% increase, while the lowest prediction was for a result of 0.2%. Bank of England policy makers will look at the data as they assess the strength of the economic recovery and decide next week whether to exit quantitative easing and withdraw emergency stimulus measures.
The weakness of the pickup in GDP has led to speculation that policy makers won’t raise interest rates any time soon and may even implement further bond purchasing to cement the recovery. The recession, which lasted for six consecutive quarters, has reduced GDP by 6%, as the economy shrank 4.8% in 2009, the biggest annual drop since records began in 1949.
Simon Hayes, chief UK economist at Barclays Capital, said “it’s clearly disappointing. The recovery is going to be uneven. I think the Bank of England will halt quantitative easing in February, but if we don’t see sustained growth it’s likely we may see them extend it in the middle of the year.”
Investors already anticipate that policy makers will exit ultra loose policy measures in February but it seems that economists are sceptical over the strength of the revival and believe that the Central Bank may need to return to quantitative easing at some stage over the coming year. The Prime Minister Gordon Brown said that he is confident the UK is emerging from the recession, but conceded that the recovery “remains fragile.”
The political sparring between Brown and the opposition leader David Cameron has continued this week, with both battling whether to convince voters that they are best placed to rein in the widening budget deficit. Alistair Darling said this week that policy makers need to adopt a cautious approach and that it would be “absolutely mad” to withdraw stimulus measures now.
In the unlikely event that the Bank of England extends the bond purchasing program beyond the current £200 billion, the Pound would come under significant selling pressure. Services, which make up roughly 76% of gross domestic product, expanded just 0.1%, while construction output remain unchanged from the previous month, emphasising the fragile nature of the recovery.
The data was the first for the fourth quarter from the Group of Seven nations and means that Britain is the last of the major economies to exit the recession. The Pound has declined on speculation that the recovery isn’t particularly strong and Euro and Dollar buyers may wish to take advantage of the current rate, or at the very least consider the benefits of a stop order before a sustained decline.
Hans-Guenter Redeker, head of foreign exchange strategy at BNP Paribas SA, said that “growth is slow and inflation is rising, and weakness of the exchange rate has to happen. We are massively bearish on the Pound.” The report yesterday was released just as the Bank of England completed on the existing asset purchase program, before policy makers decide whether to extend it at the bank’s next meeting on February 4th.
Steve Barrow, head of Group of 10 currency strategy at Standard Bank, said that investors should sell the Pound against the Dollar, betting that it will fall to as low as $1.5870. “The trade should be exited if the Pound strengthens to $1.6480.” UK stocks swung between gains and losses yesterday, as a report in the U.S showed that confidence rose to the highest level since September 2008.
EUR/USD
The U.S Dollar and the Japanese Yen made gains against the majority of the 16 most actively traded currencies yesterday, amid speculation that China will take further steps to cool its economy. The Euro fell 0.7% versus the Dollar, as the ECB executive board member Juergen Stark expressed concern that widening deficits among EU member states will undermine investor sentiment.
Reports in Germany showed that German business confidence rose by more than initial estimates to an 18-month high in January, as the global economic recovery boosted exports. The Ifo sentiment index increased to a reading of 95.8, from 94.6 in December, as the German economy continues to recover from the worst recession since the Second World War.
U.S consumer confidence rose in January to the highest level since September 2008, as the labour market continued to improve and consumers became more upbeat about the prospects of the economy. U.S stocks reversed earlier declines after the report, as the Standard & Poor’s 500 Index rose 0.1% in New York.
A form of technical analysis known as the Fibonacci sequence of numbers suggests that the Euro may slump to a seven month low of $1.38 against the U.S Dollar, following a move below the support level at $1.4118. The Euro traded around $1.4150 against the Dollar yesterday, having dropped to a low of $1.4029 on January 21st, the lowest level since July. The target of $1.38 represents a 50% retracement of the Euro’s rally from the March low.
AUD, NZD
The Australian and New Zealand Dollars both fell to their lowest levels in almost three weeks yesterday, as suggestions that China will take further steps to rein in the economy reduced the demand for higher-yielding assets. Risk sentiment is still a prominent force in the market and the Aussie weakened as traders returned to relative security of safe haven assets.
The Kiwi slumped against all of its major counterparts, as we build up to the New Zealand interest rate announcement tomorrow evening. Policy makers may choose to raise interest rates again this month, while the Aussie Dollar fell to a low of $1.8131 versus the Pound, after declining 0.9% against the U.S Dollar.
Data Released 27th January
U.K 09:30 CBI Distributive Trades Survey (January)
U.S 15:00 New Home Sales (December)
U.S 19:15 FOMC Rate Announcement
NZ 20:00 RBNZ Rate Announcement
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- FX161 Foreign Exchange Daily Insight – The Pound slips against the Euro, after the UK budget deficit expand
- The Pound continues to make gains against the majors, amid speculation that the economy will recover quicker than expected
- US economy added fewer jobs than expected during December…
- The Dollar makes further gains against the Pound as the U.S economy adds more jobs than expected
- The Dollar continues to come under pressure as the U.S economy adds fewer jobs in the last month that expected
