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Publication date: 26 July 2012
Author: Richard Driver, Analyst, CaxtonFX

Disappointing UK GDP figure takes the market by surprise

Wednesday’s UK GDP figure for the second quarter of this year was a major disappointment and took the market by surprise. The UK economy contracted by 0.7% between April and June, which is the sharpest quarterly contraction since the beginning 2009. Question marks have naturally been raised about the UK government’s ability to restore growth and its ability to safeguard the UK’s AAA credit rating.

This morning brings some words from ECB President Draghi which will be watched very closely indeed in light of soaring peripheral bond yields. Some US data follows this afternoon.

STERLING/EURO:

The UK GDP figure came in well below expectations and shunted this pair downwards.

  • The UK GDP figure brought a downside shock of -0.7%, against consensus expectations of -0.2%. This pair lost a cent as a result. It stands to reason that the UK’s top credit rating is in jeopardy, if we remain in recession and struggle to bring down our still hefty pile of debt, then the rating agencies will need little encouragement to wield their axes. Whether or not this would weigh on sterling is unclear. The US lost its top rating from S&P last year and it hasn’t hindered the dollar, whilst Germany’s bund yields remain at extreme lows despite Moody’s downgrading the country’s outlook to negative.
  • Sterling is trading at €1.2750 this morning and whilst the GDP figure may hinder the pound against some currencies, it looks better placed to rebound against the euro for familiar reasons.

STERLING/US DOLLAR:

Sterling remains under pressure against the US dollar thanks to weak confidence and awful UK data.

  • This pair remained on the back foot yesterday; global stocks continued their slide which kept the US dollar in steady demand. Sterling sold-off on the release of the awful UK GDP figure. It will be the turn of the US economy to sit under the spotlight tomorrow, when its advance GDP figure is released.
  • EUR/USD gained some upside yesterday, which took the edge off GBP/USD’s downside but we think another dollar rally could be just around the corner. For now this pair trades just below $1.55.

EURO/US DOLLAR:

The ECB’s hints of an ESM banking license ensured a positive session for the single currency.

  • A German business climate figure came in at a fresh two-year low yesterday but the euro shrugged this off to make some gains, thanks to some encouraging comments from the ECB regarding granting the ESM a banking license. We take these comments with a pinch of salt and envisage a further euro sell-off in the coming sessions.
  • Concerns surrounding Spain are highly likely to see this pair grind lower, which is exactly what EU officials and peripheral nations will want. This pair trades at 1.2150 this morning and upside potential looks limited.

STERLING/AUSTRALIAN DOLLAR:

The UK GDP figure drove this pair down to fresh four-month lows below 1.50.

  • Yesterday’s GDP data highlighted the stark contrast between the respective growth profiles of the UK and Australian economies. The last quarterly GDP posting from Australia was 1.3% and although this rate of growth is bound to slow, the country’s fundamentals are in much better shape.
  • Asian equities benefited from a rare bounce last night, which compounded GBP/AUD’s problems, so this pair is trading at low levels indeed.

STERLING/NEW ZEALAND DOLLAR:

Sterling has given back all of this week’s gains amid yesterday’s sterling-negative sentiment.

  • This pair lost the best part of three cents yesterday, which was helped last night by a neutral statement from the Reserve Bank of New Zealand. In light of rising external risks to the New Zealand economy, there was a significant chance that the RBNZ would provide a dovish statement but there was no such shift, which gave the kiwi dollar a further lift.
  • Sterling is trading back down at 1.9550 and this pair may be able to avoid further downside today.

STERLING/CANADIAN DOLLAR:

This pair finally broke away from the 1.58 level, testing the bottom of its trading range a cent lower.

  • After a week of sideways trading, the UK GDP figure gave the market the impetus to take this pair away from the familiar 1.58 level. Support has kicked in at 1.57 and we would expect sterling to benefit from a short-term bounce today.
  • Encouraging news from the eurozone also helped the loonie yesterday but we don’t expect this confidence to build.

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