IMF downgrade UK GDP forecast, but news overshadowed by continued worries over Spain and Italy

Tom Tong17/Jul/2012Currency Updates

GBP

The pound rose to a 3-1/2 year high against a struggling euro yesterday as investors, worried about growing risks to Italy and Spain’s finances, stepped up sales of the common currency and jumped aboard the relatively safe UK asset boat. It also reversed earlier losses against the dollar rising around 0.5% after US retail sales dissapointed.

However, it wasn’t all gloom without doom yesterday after the news that, according to the IMF, Britain’s economic outlook has deterioted faster than any other major advanced economy. The fund slashed growth forecasts for this year to just 0.2 percent, down 0.6 percent from the figure it predicted in the spring (last summer the figure was predicted at just over 2%). It also downgraded the forecast for next year from 2% to 1.4%.

USD

Risk aversion spread across the currency market yesterday following further signs of a slowing US economy. The dollar fell against a basket of other major currencies after a surprise dip in US retail sales in June increased speculation that the US Fed Reserve could soon implement another tranche of monetary easing to kick-start the ailing economy. The main movements in the US dollar will be shaped in the coming days by US Fed Reserve Chairman Ben Bernanke’s testimony today and tomorrow which, after yesterday’s poor data, may cause him either to hint at further quantitative easing, or dismiss the idea.

EUR

Continued uncertainty about the Spanish banks’ bailout package and expectations of further interest rate cuts by the ECB put pressure on the euro with analysts commenting that more losses were in store, especially against the British pound. The euro fell 0.4% against sterling yesterday; its lowest level since Nov 2008. However, it was able to stand its ground against the dollar, finishing European trading 0.1% up against the Greenback.

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Written by Tom Tong

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