UK Contraction in GDP causes a slide in the Pound
January 31, 2011 Leave a comment
31st January 2011 – An unexpected contraction in UK GDP has caused a slide in the Pound during the past week.
Sterling plunged on Tuesday last week after a shock contraction in Q4 UK GDP. Britain’s economy shrank 0.5% in the last three months of 2010, confounding forecasts for a 0.5% expansion, with December’s heavy snow accounting for only part of the first contraction in five quarters. As the chart below shows, Sterling fell approx. 1.75% from 1.1720 to 1.1536:
The figures will be bad news for the government, which is due to start cutting public spending in early in 2011. They will also cast doubt over previous market expectations that the Bank of England will raise interest rates in the first half of the year. While last week’s GDP figures are backward-looking, they are nevertheless crucial to understanding the resilience of the economy to shocks. It seems that the economy is incredibly vulnerable and with the fiscal tightening yet to fully bite, we will have to brace ourselves for a bumpy ride.
Other economic figures last week showed that Britain’s public sector net borrowing rose from a year ago to its highest December reading on record and UK consumer confidence suffered an ‘astonishing collapse’ as Britons’ confidence in the economy and their finances witnessed its biggest drop in close to 20 years, raising fears that the Government’s austerity onslaught will set off a self-feeding downward spiral.
Graph Dec 2010 – January 2011
Despite all the doom and gloom Sterling did receive a brief lift after minutes from the Bank of England’s policy meeting showed policymakers considered an interest rate hike with (MPC) member Martin Weale unexpectedly joining Andrew Sentance in voting for a quarter-point rate rise. It’s important to note however that this meeting occurred a week before the Q4 GDP data the MPC members would have based their decisions on existing forecasts. Sterling reacted positively to this news albeit a little muted and recovered 0.75% of its losses to rise to 1.1637
An indirect and potentially future event risk came as Standard & Poor’s rating agency downgraded Japan for the first time in nine years, citing lack of a “coherent strategy” to control its monster budget deficit. The move is a reminder that sovereign debt woes continue to fester across much of the world and still pose a threat to the fragile global recovery; this may also be a reason behind the coalition government’s adherence to its austerity plan.
This past week’s events have highlighted the volatility still present in the Foreign Exchange markets and the need to remain in close contact with your currency broker to ensure the best possible chance of securing a favorable Exchange rate despite the circulating uncertainties. The coming week is a little lighter on economic data but no less important when safeguarding your currency needs.
If you have yet to open a trading facility to gain access to commercial rates of exchange click here to open an exchange rate account today and an experienced trader will be in touch to discuss your requirement and offer expert market knowledge.