Sterling continues to fall ahead of keenly anticipated GDP figures

Tom Tong25/Jan/2013Currency Updates

GBP

Sterling had a poor day of trading on Thursday as it managed to not only fall to an eleven month low versus the euro, but to a five month low versus the US dollar. The performance by the pound throughout this entire week can be largely attributed to many market investors already positioning themselves for data likely to show that the UK’s economy shrank in the fourth quarter of last year.

The general feeling held by many is that the British economy had contracted by 0.1 percent in the last three months of 2012 from the previous quarter. However, the estimates have varied somewhat from a 0.2% growth to 0.6% contraction. Macro funds, among others, are those thought to be the big sellers of the pound before the fourth quarter’s figures are released on Friday.

With the UK economy already seeming to have struggled since the beginning of 2013, a weak GDP data reading could once again invite speculation that the Bank of England will opt for further quantitative easing in the coming months. This decision would mean huge U-turn from the outcome of the MPC’s minutes released earlier in the week that suggested policy makers had doubts about the need for further stimulus to boost the faltering economy.

It is understood by some strategists that Prime Minister David Cameron’s continued promises to hold a referendum on Britain’s membership of the European Union has also has had a detrimental effect on longer term sentiment towards sterling by sowing uncertainty amongst investors.

EUR

Thursday saw the common currency make some significant gains versus a basket of different currencies on the back of better than expected PMI data which measures private business activity, coming out of the eurozone.

The Purchasing Managers Index published by London based Markit researchers, which is a survey of thousands of eurozone companies’ activity, logged a rise to 48.2 points in January compared to 47.2 points the previous month, with January being the third increase running for the index. This reading helped the euro to rise two percent against the yen and hitting sessions highs versus the dollar, with traders citing optimism about repayments of cheap three year loans taken by banks from the European Central Bank just over a year ago.

Slightly less positive news from the eurozone was that the manufacturing production fell for the 11th month in a row, with both the manufacturing and services sectors each registering their smallest retreat in 10 months and although the key eurozone economy of Germany powered back to growth, the No. 2 economy France is still in contraction.

It was said by the German Foreign Minister yesterday that ‘ The eurozone has left the worst of its debt crisis behind, but its countries cannot relax and have to continue their fiscal consolidation efforts’

USD

Without a huge amount of data coming from the United States, it was a fairly mixed day for the Dollar yesterday after the U.S. Labor Department announced that first-time applications for jobless benefits fell to the lowest levels since January 2008. although the two week improvement in initial claims is not yet a trend but it is thought it will reflect a better atmosphere in Washington with an indication of employers more willing to plan for the future.

In light of the positive data the Greenback made gains versus the British Pound Sterling however lost ground against the common currency after better than expected data released from the Eurozone. The american currency also witnessed a strengthening versus the Japanese Yen with following the countries recent policy decisions giving way to expectations for further monetary easing.

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Written by Tom Tong

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