The pound reached a 9 week high against the euro yesterday amid the continuing sovereign debt crisis in the euro zone.
The little UK data published yesterday confirmed that the UK economy grew at 0.8% between July and September as expected. The figures, which follow last month’s preliminary estimate, confirm the economy slowed from the growth rate of 1.2% in the second quarter.
David Kern, chief economist at the British Chambers of Commerce, said “The figures confirm our assessment that the UK economy is in a more robust state than many had thought”.
“But we have not yet seen the impact of the tough deficit cutting measures that the government will start implementing early in the New Year,” he added.
Analysts also noted the slowdown in consumer spending and said they expected the economy to continue slowing in the months ahead.
“We expect the impact of government spending cuts, concerns about job security in the public sector and uncertainty caused by the escalating financial crisis in Europe to become even more evident as we move towards the end of 2010,” said Chris Williamson at Markit.
“The rate of economic growth therefore looks set to slow further in the fourth quarter, possibly down to around 0.4%, based on the survey evidence we have seen to date.”
In the short term, we may well continue to see the pound hold on to recent gains against the euro as the euro continues to slide against the dollar as investors digest the Irish Republic’s austerity plan.
The euro has now fallen by more than three cents this week against the dollar.
The four year Irish plan is designed to save 15 billion euro’s through spending cuts and tax rises but investors remain unconvinced. There also are also doubts about the whether the government will be able to push through its austerity measures when parliament votes on the budget on 7 December. The government is also negotiating a bail out package with the European Union and International Monetary Fund that is expected to be worth about 85 billion euro’s.
Compounding this uncertainty are fears that the Irish debt crisis will spread to other countries with high deficits, in particular Portugal and Spain. All these factors are putting pressure on the euro. To further exacerbate the pressure on Ireland, Portugal and Spain, new figures show that German business confidence has hit its highest level since reunification providing further evidence of the country’s strong economic recovery.
The Ifo Business Climate Index climbed to 109.3 in November, up from 107.7 the previous month, defying analysts’ predictions of a slight fall.
“The upswing in the economy is gaining more and more strength,” Ifo said.
In a sign that the US economy may have turned a corner, data out yesterday shows rising US household income and spending in October giving Wall Street and the US dollar a lift despite continuing housing market woes.
Personal income was up 0.5% versus a month earlier with consumer spending up 0.4%, the commerce department said.
The news, along with a surprise drop in unemployment benefit claims boosted US shares with the Dow Jones ending the day 1.4% higher.
Markets seemed unconcerned at separate data that showed house prices and sales of new homes in the US falling again.
We have now seen the pound rise over 6 cents against the euro in the last 5 weeks. The consensus of opinion amongst analysts seems to be that the economic situation in the UK will worsen over the next 6 months so clients looking to sell pounds and buy currency may do well to consider at the very least adopting a hedging strategy and securing at least half their requirement and secure current rates.
