UK enters a technical
recession but sterling still flying high
The preliminary reading of the UK’s Q1 GDP figure came in
last week to reveal a 0.2% contraction, which triggered a wave of headlines
regarding the UK economy having entered a double-dip recession. Still though,
the pound is on the offensive across the board, which is really a reflection of
its growing safe-haven demand.
There is widespread scepticism with regard to the latest GDP
figure and many, including us, are expecting an upward revision towards the end
of May. What’s more, the figure does little to change the Bank of England’s
monetary policy outlook as the MPC had already recognized the risks of Q1
contraction and appear confident that growth will pick up this year. The UK
government’s response has been to reaffirm its unwavering commitment to keep
the UK’s international borrowing costs low through ongoing austerity measures -
a popular stance with the market.
The UK’s monthly set of growth figures will roll out over
the next few days and readings of the manufacturing, construction and services
sector are expected to show a slowdown. Judging by the performance of sterling
in the past fortnight though, next Thursday’s BoE quantitative easing decision
represents the next major domestic risk event. The MPC is likely to remain in
wait and see mode next week, regardless of the UK’s economic slump in the past
three months.
US growth slows down to
strengthen Bernanke’s dovish position
The first quarter US GDP figure came in at 2.2% (annualized) last week, well below
the 2.6% reading that was anticipated. Whilst clearly outpacing the UK economy,
this slowdown is playing into the hands of the more dovish members of the US
Federal Reserve, particularly Chairman Ben Bernanke. Bernanke stated that US
monetary policy is “more or less in the right place” at the moment and interest
rate hikes aren’t expected for at least another couple of years. However,
Bernanke has once again emphasized that the door remains well and truly open to
a third round of quantitative easing and it is this factor that continues to
hurt the US dollar.
This Friday brings the monthly US non-farm payrolls figure, the most important
indicator of growth in the world’s leading economy. A weaker number is
expected, so it is unlikely that the US dollar, in the short-term, will return
to strength on the basis of domestic economic strength. However, the US dollar
will remain a safe-haven target if eurozone nerves jangle again, as they may
well do as the weekend approaches.
French and Greek elections
come into focus
Eurozone jitters are likely to increase ahead of the weekend’s final French and Greek
elections. Sarkozy’s rival Hollande is looking favourite to win the French
presidential election, while there is chance that Greece’s two major parties
(the current coalition) will fail to secure a majority. Amid this huge
political uncertainty, we may well see the euro struggle this week.
End
of week forecast
| GBP / EUR | 1.24 |
| GBP / USD | 1.6350 |
| EUR / USD | 1.31 |
| GBP / AUD | 1.57 |
Sterling is trading up towards €1.23 this week, which is the
result of a 2.5% climb for this pair in the past month. Further gains for
GBP/EUR look probable. Sterling is trading marginally off an eight-month high
of $1.63, which is still an excellent level at which to purchase USD. There may
be room for a little more upside in the short-term but a weaker EUR/USD should
eventually drag on GBP/USD.
May 2012 Outlook Report: Sterling flying high » « Sterling rallies as market bets against further UK quantitative easing
Copyright 2006 - 2013 Compare Money Transfer Ltd : All Rights Reserved