Sterling rallies as UK avoids triple-dip recession with better than expected quarterly GDP figures

Tom Tong26/Apr/2013Currency Updates

GBP

Yesterday’s GDP numbers saw commentators and analysts scaling back their expectations for further quantitative easing (QE). QE is a drag on sterling and any suggestion that it is to be consigned to the scrap-heap is good news for the UK currency. Analysts said yesterday:
“The GDP data seems to vindicate the Bank of England’s recent upbeat claims on the economy and its outlook. Business sentiment has improved as have credit conditions and this should hopefully help support continued growth through the rest of this year.’ From a monetary policy point of view, we are now less convinced by the prospects that the Bank of England will follow the Federal Reserve and Bank of Japan in opting for more asset purchases.

Economists had predicted growth of 0.1pc. with several warning that the economy would slip into its third recession in five years after the 0.3pc decline at the end of 2012.
In the event, solid 0.6pc growth in the powerhouse services sector carried the UK to its best performance since the Olympics. Overall, for the 12 months to March the economy grew 0.3 percent.

Vince Cable, the Business Secretary, warned that the figures were only “modestly encouraging” and pointed to “serious issues” over weak lending to small businesses, the deep recession in the construction sector, and disappointing exports.

HSBC economist Simon Wells said: “[Growth] is very welcome because it means the UK has avoided the ‘triple-dip’ and any associated dent to confidence. However, there is no escaping the fact that underlying growth remains weak.”

USD

The dollar fell dramatically against the pound yesterday after UK GDP came out 0.2% better than expected at 0.3 for the first quarter. Despite this fall we still saw some positive news out of the U.S as jobless claims came in better than expected and alleviated some concerns about the slowdown of the world’s largest economy.

Despite this positive news, worries over the US economy persist given recent signals that economic activity softened in March and April. This is now known by many economists as the ‘Spring swoon’ due to this happening now two years on the spin.

The market waits in anticipation for U.S GDP data which is due out later today.

EUR

Yesterday was quiet for data out of the eurozone, with only Spain’s unemployment data being released. Spain’s unemployment rate has now risen to 27.16%, still climbing from last quarter’s figure of 26.02%.

The ECB is expected to announce a 25 basis point rate cut when it meets next week following on from series of disappointing data releases from the region, including signs that Europe’s largest economy, Germany, was struggling. Yesterday we saw Angela Merkel make a rare foray into the debate on central bank interest rates, stating the ECB would have to raise interest rates if it were looking at Germany alone but this was not feesable due to the variety of financial needs of the eurozone.

Spain is expected to unveil its economic growth measures, a move which will stoke the fire on the European debate on austerity as Mariano Rajoy seeks flexibility for the EU on budget deficit targets. Italy welcomed its new prime minister, Enrico Letta, who released a statement “Europe’s policy of austerity is no longer sufficient.”

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Written by Tom Tong

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