UK Deeper In Recession: A Warning For GBP Exchange Rates

The pound stumbled yesterday after revised UK GDP figures showed the UK economy was actually deeper in recession than first estimated in the first quarter of the year.  The economy actually contracted by 0.3% and defied any expectation that the initial estimates may have been wrong- the UK is definitely in recession.

Slightly more worrying is that the Bank of England also revised their growth forecast for the UK down last week, stating the longer the crisis in Europe runs, the more trade the UK will lose.  Coupled with the fact that the Head of the IMF also stated UK policy may have to change and possibly cut interest rates, or get money moving round the economy with more Quantitative Easing (both of which would likely weaken the pound) then I am inclined to feel that sterling is unlikely to make much further headway against the single currency at present.

The fear that surrounds Greece has been driving the Euro down rather than the UK economy boosting the pound up against the Euro.  To some extent the Euro crisis will have to come to a head soon- my fear is that if Greece were to fall out of the Euro that rather than see the pound shoot up against the Euro, money will flood out of European currencies altogether (including the pound) and move towards the USD in a huge flight to safety.

The Jubilee, Olympics, Euro 2012 & Sterling Exchange Rates

Sterling exchange rates: Whilst the UK is in recession many analyst are suggesting it will be short-lived.  However they may be forgetting the very excuses some politicians and economists have used in the past for an unexpected dip in economic output.  Remember the Royal Wedding?  The extra bank holiday was blamed for wiping millions off the UK’s economic output due to time off work.

With the upcoming celebrations huge amounts are expected to be spent on alcohol, BBQ’s and general entertainment with a huge boost in tourism.  What if the UK’s extremely “reliable” weather lets us down this summer and rain puts a damp squib on things?  What if forecasters have got their estimates wrong and the Olympic budget goes even higher resulting in an even higher budget deficit?  What if England crash out of the Euros more spectacularly then Greece may crash out of the Euro?  All this extra money is hardly guaranteed and may result in the UK slipping further.  Given current GBP EUR rates are the highest in 3 years do you want to gamble on a series of events (particularly Greece and its future in the Euro) that nobody can accurately predict?  A €300,000 property is currently some £22,000+ cheaper than November last year; it may be worth booking a forward contract to secure your rate if you don’t think the UK economy is likely to improve significantly in the short term.  Call 0800 328 5884 to find out more. 

Also bear in mind that if you have a deadline to trade then the two bank holidays in June may prevent you trading anywhere in the UK but the currency markets will still be moving.  Protect yourself by speaking to your broker at FCD about a stop loss or limit order during this period.

US Dollar And The Flight To Safety

The Dollar has been the chief beneficiary of the current Euro crisis with the Dollar having moved from over 1.60 earlier in the month a good time to buy US Dollars predicted on May 3rd appears to have been right) down to 1.56+ yesterday as people look to bail out of Europe into safer havens.  With no imminent end in sight for the Euro crisis, and no ending which seems particularly palatable, combined with risks of the UK deteriorating further, then I think the Dollar will remain fairly robust despite its own domestic woes.  Official US GDP data isn’t out until the end of the month but be prepared for a further slip in the meantime due to a lack of market confidence.

Will Eurobonds Save The Euro?

Mario Monti, the Italian Prime Minister, has suggested Eurobonds (where debt is issued jointly against all Euro countries rather than one in particular to average out the borrowing cost) should be considered very soon.  The move is supported by France’s new President Hollande but deeply opposed by Germany’s Merkel (as Germany would have to pay higher borrowing costs to help reduce those of Greece and others).

The Euro is currently in free-fall against the greenback and has lost massive ground to a weak pound because of the crisis in Europe and it looks as though something must be done to change tack before Greek elections in June to avoid a Greek exit becoming inevitable as it is highly unlikely Greeks will vote for more austerity.  If Hollande’s view wins over more support, then growth rather than spending cuts will likely be Europe’s focus and could just cause the Euro to fight back against a vulnerable pound.

Kiwi Dollar Fights Back Despite Euro Concern

The Kiwi Dollar managed to halt its recent slump against the pound after the ratings agency Standard and Poor’s gave the NZ government the thumbs up over their plans to get the budget back into surplus.  Concerns over the Kiwi remain though so expect GBP NZD to remain volatile as the crisis in Europe could cause further surges as markets in the antipodes remain very jittery- I would expect the Kiwi to remain above two dollars if the Euro crisis worsens.

If you would like more information on this report call 0800 328 5884 or 01494 725 353 or e-mail cmg@currencies.co.uk

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