UK growth forecasts cut as France nears recession

Tom Tong17/Jan/2013Currency Updates

European policymakers, Japan and Russia stated the world is on the brink of a fresh “currency war” when expressing concern about the economic cost of rising exchange rates. The Japanese weakened the Yen for an export driven recovery.

Blockbuster followed HMW and Jessops to become the third household name in a week to collapse.

EUR

Economic data was in fairly short supply, with Euro-zone CPI for December confirmed at 2.2% in line with expectations. European policy makers fired the first shot in 2013, Luxembourg stated that the Euro was dangerously high and officials in Sweden and Norway also expressed their concerns about the exchange-rate.

Since the Euro has regained mild traction, it seems there is a new obstacle in its path – it traded near a 10 month high of 1.34 against the dollar. This news marks a significant cloud of worry over the German economy as exporters are already saddled with increasing labour costs, and a cut in it’s growth forecast to 0.4% down from 0.7%. Germany has long been a source of confidence for Europe, seemingly single-handedly bailing out a sinking ship. German exports are integral to the growth of Europe and there are no signs from the ECB acting to weaken the currency, not a goal in itself according to Mario Draghi.

Early signs of retaliation have been from Switzerland blocking the appreciation of its currency against the Euro and the Deputy Governor of Norway’s central bank made clear that the strengthening of the Kroner (perceived as a safe haven against the Euro) could lead Norway to cut interest rates as early as March.

German 10 year Bunds advanced before Spain sells 4.5 billion Euros of debt, due at several points across the next 30 years. The European Central Bank will publish its monthly report containing detailed analysis of the prevailing economic situation and the risks to price stability due at 9am.

Further rise in the Euro is likely to wear down the resistance of the ECB to cut it’s main policy rate from 0.75%. France is expected to slip in to recession after it contracted 0.1%. The Euro-zone will not return to growth until the next quarter.

USD

CPI was released yesterday at 0.1% lower than consensus and the previous performance. This would indicate that the purchase power of the USD was dragged down by inflation. US industrial production grew 0.3% in December, matching economic forecasts.

Stocks opened slightly lower amid an important day for earnings reports, also weighed by a cut in economic expectations. The World Bank expects the global economy to grow by just 2.4% this year which is down from its projection 6 months previously of 3% for the year.

GBP

Anglo American extended its losses yesterday post restructuring its platinum operations, which resurfaced the backlash in South Africa from politicians and unions leading to strike action in its mines. It’s peers Xstrata and Glencore also lost over 3% of share value. Tesco endured a bad day of trading after it’s share value went down 0.7% following reports of its burgers containing traces of horse meat and pig DNA. On the positive side of the FTSE was TUI Travel gaining over 4.2% after its parent company TUI AG had approached them about a merger.

The pound dropped to a seven week low against the greenback after the World Bank cut growth forecasts, spurring a demand for the safest assets. UK government bonds advanced in its longest run since December as the sterling declined against all 16 of its major peers.

David Cameron is expected to be outlining his plans to repatriate powers from the European Union. Finnish Prime Minister Jyrki Katainen evoked British fast-food preferences in an attempt to persuade the UK to remain part of the bloc, describing the Union without Britain as “pretty much the same as fish without chips. It’s not a meal any more”.

On the back of this, Sterling prospects are of concern as the Prime Minister looks to adjust the state of play the UK has within Europe. Thus fuelling a negative outlook for the pound at least in the short term. It seems as if markets are getting ahead of themselves, potentially talking themselves in to more optimistic scenarios of global economic recovery. Yields in gilts have directly risen as a result of this. The sterling has weakened 1.7% this year, the third worst performing currency after the Yen and Swiss franc.

Data to watch out for today will be the auctioning of 1 billion GBP of inflation linked debt due in 2029.

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Written by Tom Tong

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