The pound fell sharply across the board yesterday after the shock GDP data from the UK.
The pound, which had been rising as recently as 10 January on increasing expectations that the Bank of England would be forced into raising interest rates to control persistently higher than expected inflation is now firmly under pressure after data showed a shock contraction in fourth quarter gross domestic product which unexpectedly fell 0.5% from the previous quarter. A slowdown from 0.7% in the third quarter to 0.5% in the fourth had been expected.
In the overnight Asian markets, the pound continued to fall after last night’s comments from Bank of England Governor Mervyn King who seemed more concerned with the rise in inflation than with the fall in UK fourth quarter GDP. King warned that inflation could rise to nearly 5% before easing back in 2012. Analysts are now suggesting the UK could be gripped by stagflation, a time of rising inflation coinciding with slow growth not seen in the UK since the 1970’s. Stagflation is a huge concern for the authorities as the traditional measures for controlling rising inflation, a rise in interest rates exacerbates the problems of a slowly growing economy and vice versa.
The euro has continued to benefit from more positive sentiment with respect to yesterday’s European Financial Stability Fund (EFSF) bond issue which attracted good demand out of Asia, with Japan said to have bought around 20% of the bonds issued. The bond issue was nine times over-subscribed.
Better corporate earnings data in Asia has improved risk sentiment in those markets and the prospects of the high yielding commodity driven currencies like the Australian, New Zealand and Canadian dollars and South African Rand.
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.”
