The pound was trading as recently as 10 January at over 1.20 against the euro but fell yesterday to 1.1696 on the back of a stream of poor economic data from the UK together with an improved outlook for the euro.
Today sees the publication of the first release of UK GDP data for the fourth and last quarter of 2010. Expectations are for a decline from the 0.7% registered in the third quarter of 2010 to a figure of 0.5%. However, December’s bad weather could accentuate the expected slowdown in UK economic activity and public finance data due out later today is unlikely to ease the pressure on the pound.
Some analysts are suggesting that the UK economy is already showing the first symptoms of stagflation, the toxic cocktail of stagnating growth and rising prices that leaves policymakers unable to tackle one problem without making the other worse, a problem that last blighted the UK in the 1970’s.
The dollar weakened yesterday versus 12 of its 16 peers and reached a two month low against the euro as concerned eased about Europe’s debt crisis and speculation increased that the European Central Bank (ECB) may increase interest rates in the euro zone to help fight inflation.
Today could see a rebound in sentiment towards the US dollar with US consumer confidence figures for January are expected to have improved from December’s figure and a State of the Union address by President Obama which is expected to be more business orientated.
The IMF has raised its world economy growth forecast from 4.2% to 4.4% for 2011, highlighting a two-speed recovery as advanced economies grow slower than emerging ones.
The IMF said in its report: “In advanced economies, activity has moderated less than expected, but growth remains subdued, unemployment is still high, and renewed stresses in the euro area periphery are contributing to downside risks.”
However, emerging economies were more “buoyant”, the IMF said, with signs of overheating and inflation pressures a worry.
Commentary By Tony Redondo
“Any opinions expressed in this document are those of TorFX analysts. Any analysis and/or forecasts provided are aimed at helping clients understand market conditions and developing trends. Clients are wholly responsible for their own trading decisions.”
