Market anticipates positive UK GDP figures as German IFO disappoints

Tom Tong25/Oct/2012Currency Updates

GBP

Sterling hit a one-week high against the euro on Wednesday after disappointing European data with further gains for the pound being largely dependant on UK growth numbers due later on today. The euro fell 0.6 percent against the pound, slipping well below its 200-day moving average which has left the door for further losses. The pound also managed gains against the Dollar recovering from a 6-week low of struck on Tuesday, however many investors in the market were wary of buying the currency in large amounts ahead of key UK gross domestic product data.

Preliminary UK GDP data for the third quarter on Thursday is expected to show the economy pulling back out of recession but there is little prospect of more bullish growth. The Bank of England Governor Mervyn King’s comments that on Wednesday that policy-makers would have to think “long and hard” about pumping any more cash into the economy, dampening hopes of clearer support for more stimulus as early as November.

EUR

The euro fell to a one-week low against the dollar on Wednesday after worse-than-expected German business activity and sentiment data fuelled concerns of weakness in the euro zone’s largest economy. Adding to the bad news the Purchasing Managers’ Index data released yesterday showed activity in the euro zone as a whole also contracted more sharply than forecast in October, suggesting the currency bloc’s economic decline was deepening, this in turn had a negative on the common currency.

Expectations that indebted Spain is moving closer to asking for a bailout, which would enable the European Central Bank to buy its bonds and lower borrowing costs, have helped support the euro in recent weeks. But uncertainty about the timing of such a request has deterred investors from chasing the currency higher on Wednesday.

In other news the Euro area government debt hit 8.53 trillion Euros which equates to 90.9 percent of the seventeen countries overall GDP in the second quarter of 2012. This was a large increase from 88.2 percent of GDP in the first quarter of the year.

USD

The Dollar had a mixed day of trading yesterday with it losing ground versus the Pound but making gains against the Euro. The American currency benefited on Wednesday after poorer than expected data from the Eurozone led to a fall in risk appetite and a commentary from Mario Draghi warning of the danger of falling prices, these factors both raised the possibility of the ECB reducing interest rates in the near future, perhaps by 0.25%

Sterlings strength was forged against the Greenback on Sir Mervyn King’s speech on Tuesday evening which many had anticipated would be quite doveish and pessimistic, much in the line with the trend of previous speeches from the BOE governor, however it was more neutral in tone, adding that he saw “price growth” being a “little stronger” in the future. This statement has been seen by many to be in line with the UK’s 3rd quarter GDP print released later today. If growth comes out strong then this could help raise sterling versus the euro and Dollar as the U.K will stand out from the crowd in relation to economic growth.

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Written by Tom Tong

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