Tuesday, 25 January 2011

Pound falls vs Euro, GDP figures today

25th January 2011
Good morning. Sterling fell against the US Dollar and Euro yesterday due to doubts over when the Bank of England will raise interest rates. Falls against the Euro were bigger as the single currency drew some support from easing debt worries and tough talk about keeping inflation in check from European Central Bank chief Jean-Claude Trichet.

Today we have GDP figures for the UK which will cause volatility. More on this after the usual snapshot of rates as at 08:30am:
  • GBP/EUR 1.1666
  • GBP/USD 1.5922
  • GBP/AUD 1.5991
  • GBP/NZD 2.0811
  • GBP/CAD 1.5810
  • GBP/CHF 1.5123
  • GBP/ZAR 11.169
  • GBP/JPY 131.24
  • GBP/HUF 319.34
  • EUR/USD 1.3646

Sterling falls on Interest Rate expectations

Yesterday a Daily Telegraph article said the UK could be headed for stagflation and even small interest rate hikes could hurt. Implied rates based on overnight indexed swaps have pared chances of a 25 basis point rate hike in May to 65 percent, from 70 percent late last week.

Sterling has been well supported since higher-than-forecast UK inflation data this month caused investors to bring forward expectations for when the BoE will raise rates. However now that it looks like there is less chance of a hike any time soon, the Pound fell and exchange rates dropped.

As I mentioned in the intro, there was also tough talk from the ECB president about keeping inflation in check. This may mean an interest rate hike in the EU before the UK and so the Euro gained strength, compounding the fall in GBP/EUR rates.

UK GDP Growth figures today

The first estimate of 4th Quarter GDP will be released today and analysts expect growth to have slowed as a harsh winter is likely to have hurt construction activity and the service sector.

"With public finance data also due out the same day, traders will have a lot to digest in relation to the pound and its recent gains," said Michael Hewson, analyst at CMC Markets. "It could well be an interesting week for sterling."

The GDP figures, due to be released at 09:30am, are expected to show growth of between 0.2% and 0.6% in the three months up to December.

Howard Archer, chief UK and European economist at IHS Global Insight, said there was considerable uncertainty over how much December's severe weather hit overall activity.

As a result, the range of forecasts is wide, from 0.2% to 0.6%. The "consensus figure", drawn from a range of forecasters, is that the Office for National Statistics (ONS) will announce a 0.4% increase in growth in the fourth quarter.

If the figure is less than this then we expect Sterling to fall sharply. Of course any surprise increase in the figure and this may support the pound, but in our view there is more chance of worse than expected figures, and so the recent upwards trend in Sterling exchange rates could be reversed and the recent highs we hit vs the Euro and US Dollar may not be seen again for some time.

Today's Data in full

The most important UK figure today is the Gross Domestic Product. This is a broad measure of economic activity and shows if the UK economy is growing in line with forecasts. It often creates some volatility for Sterling. Later in the day we have some Consumer Confidence figures from the USA.

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