The UK sees a negative GDP reading as chances of QE increase whilst Syriza head the polls in Greece
25/May/2012 • Currency Updates•
Yesterday saw a less than successful day of trading for sterling as it struggled to hold its position hovering just above a two month low versus the dollar with many in the market predicting further QE coming from the UK in the coming months. There was a negative reading in gross domestic product for the first quarter in 2012 of -0.3 percent from an initial estimate of -0.2 percent on Thursday, which was strongly driven by a 4.8% fall in construction output which is the steepest decline seen for eleven years. These readings worsened any existing concerns that have been held regarding the troubled British economy. It was pointed out by the Prime Minister’s spokesman that while exports of goods to non-EU countries had grown by 4.4 per cent over the period, exports to the EU had fallen by 3.1 per cent. This negative data being released along with the ever lingering problems coming from the eurozone has prompted a large amount of investors to seek solace within the safe haven currencies namely the US dollar. With the downward revision to UK first quarter gross domestic product being added to bad retail sales data and the downward trend in UK CPI inflation, many are now believing that further QE is to be the only solution in boosting the UK economy.
The pound did however manage some marginal gains versus its European counterpart as the euro fell by 0.1 percent versus sterling. Some strategists are expecting the euro to continue this down trend versus sterling as the UK may be getting some safe haven flows.
Another painful day for the euro as it extended on its 22 month lows against the US dollar on Thursday. The single currency managed to fall for a third day running as poor German economic data signified to investors that no country in the region was immune from the debt crisis. The weaker-than-expected German Ifo business climate index and manufacturing PMI data for May suggested that growth in Europe’s largest economy may be starting to slow. The manufacturing report from Germany has added to the worries of investors who are already deeply concerned by both the problems in Greece and the similarly indebted countries such as Spain. It has been largely anticipated in the past months that Greece will indeed exit the eurozone. The only question has been when the exclusion of the troubled country will actually take place. The timing of the Grexit all hinges on the elections being held on the 17th of next month and it was said yesterday that the far-left party, Syriza, was now in possession of 30 percent of the countries votes. With this particular party being anti-austerity, it seems that the the country will leave the euro and return to using the drachma.
It was announced yesterday by Italian Prime Minister Mario Monti that a majority of European Union leaders at a Brussels summit earlier in the week backed the idea of joint euro-area bonds. The benefit of having these bonds is that it will enable countries like Germany to support other euro members debt and embrace the common good of Europe.
With negative news from both the UK and the eurozone yesterday, the dollar benefited largely from an increase in risk sentiment. The euro remained near a 22-month low against the dollar on Thursday as poor IFO figures were released from Germany with it largely seen as the only country with the ability to save the single currency. This along with European Union leaders ending their latest summit without any firm plans to address the region’s debt crisis has once again weakened the euro versus the dollar for the third straight session. The US currency also experienced some gains versus the pound with poor UK GDP figures fuelling speculation that the bank of England will indeed opt for another round of QE.