Sterling still flying high despite technical recession - Business Works
BW brief

Sterling still flying high despite technical recession

Richard Driver of Caxton FX 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.

Richard Driver is a Currency Market Analyst with Caxton FX and can be contacted via:

This brief is prepared by Caxton FX Ltd for information purposes only and may contain personal views that are not the opinion of the company. This is not an offer to purchase or sell any security or an investment advertisement. Caxton FX Ltd is authorised and regulated by the Financial Services Authority, although foreign exchange transactions with Caxton FX are regulated by HM Revenue and Customs. This email does not constitute advice for any foreign exchange transaction, nor is it intended as a solicitation for funds or recommendation to trade.

Tweet article
BW on TwitterBW RSS feed