Sterling loses ground; GDP results add to UK recovery fears

Tom Tong30/Mar/2011Currency Updates

GBP

Sterling remained at five month lows against the euro and lost further ground versus the US dollar as data showed a shrinking UK economy.

The office for national statistics stated gross domestic product had fallen by its biggest margin since the second quarter of 2009, coming in at -0.5%. This loss was fractionally smaller than anticipated at estimates of -0.6%. However, it has done little to quell fears over the speed of the economic recovery. Analysts now look towards the preliminary reading for 2011 Q1 GDP released at the end of April, which is widely seen as a more important indication of the health of the economy moving forward.

The pound is suffering heavily against the euro at present as it is generally accepted that the ECB will implement an interest rate hike prior to that of the Bank of England. The next meeting of the BoE and ECB will take place on April 7 with it looking increasingly likely that no immediate change will be forthcoming from the Monetary Policy Committee in the bid to tackle mounting inflationary pressures.

EUR

The euro was able to maintain its gains against the pound on Tuesday as the potential for April rate hikes in the Eurozone look a forgone conclusion.

ECB Chairman Jean Claude Trichet’s Paris speech on Monday evening did little to quash the feverish speculation surrounding interest rates as he reiterated his desire to counter inflation, seemingly giving the green light to the ECB to raise the level when they next meet on April 7.

As things stand, euro interest rates remain at the record low of 1.0 percent. However, it will come as little surprise if this does increase in April – a move which looks certain to be in advance of the Bank of England.

In further news, S&P downgraded Portugal and Greece one notch to BBB- and two notches to BB-, respectively. However, the common currency shook this news off, remaining resilient against the pound and sterling overnight.

The major news out of the Eurozone this week is due for release on Thursday as the Central Bank of Ireland will publish the stress test results four Ireland’s four major banks. The results will indicate what type of additional cash injection the banks may require, which comes at a time where tensions continue to simmer amid the ongoing Eurozone debt crisis and the potential bailout of the debt-laden Portugal.

USD

The dollar experienced gains against the pound and euro during Tuesday trading after top Federal Reserve official James Bullard stated in Prague that the $600B asset purchase plan should be shortened by $100B, allowing for an increase in interest rates more rapidly than the Fed had planned.

The dollar escaped largely unscathed on Tuesday as consumer confidence fell in March after hitting three year highs in February. The figure was down to 63.4 from a reading of 72.0 the previous month, as expectations about jobs and income growth worsened, while the political uncertainty in the Middle East and the rise in oil prices weighed heavily on consumer sentiment.

The main data release to watch out for today comes in the form of the ADP Employment Change figure for March, released at 13:15. The figure is anticipated to show a decline in employment from a previous reading of 217K to 205K. If this does come out as anticipated it will not bode well for Friday’s non farm payroll release and could be reflected with a weakening of the currency.

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Written by Tom Tong

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