UK enters double dip recession, but outlook remains positive for Sterling

April 26, 2012 | By | 1 Reply More

Pound Slides as UK Re-Enters Recession

 

Peter Lavelle at foreign exchange specialist Pure FX

25.04.2012

Welcome to my weekly update regarding the foreign exchange rates. These are intended as a very brief guide to what’s affected the market in the last week, to help you decide if now’s the best time for you to change currencies.

Here are the main points this week:

1. The pound has lost ground across the board, including more than half a cent against the euro, as official data shows the UK re-entered recession in Q1.

2. In spite of this, sentiment in the Eurozone remains weak, as Francois Hollande’s victory in the first round of the French presidential election signals a backlash against spending cuts.

3. In the US meanwhile, Fed Chairman Ben Bernanke is expected to be cautious about the recovery this week, as recent data shows the US again losing pace.

4. Last of all, the economic outlook in Australia has grown muted, as data reveals China vast manufacturing base continues to contract. That could prompt AUD weakness.

 

Glam Rocker from 1970s

Britain enters a double dip recession for the first time since the 1970s

In depth: 

Let’s look at these points in more detail then.

So the UK has entered its first double dip recession since the 1970s this morning. Official data reveals that Britain contracted -0.2% in the first three months of 2012, in addition to the -0.3% contraction recorded in Q4 2011. This came as a huge shock to the markets, which had pencilled in +0.1% growth this quarter, hence sparking a mass sell of the pound against currencies from the euro to Canadian dollar. Obviously it signals that George Osborne’s economic strategy isn’t generating growth, even as he remains on target to eliminate the UK’s budget deficit. This is now being hailed as the UK weakest recovery since the 1910s. On the plus side, Eurozone data looks set to show that the UK is in good company next week, which could help the pound gain back its lost ground.

Furthermore, unlike the UK which remains at least politically stable, this past week has seen a huge rebellion in the Eurozone against the so-called austerity agenda. The victory of Francois Hollande in the first round of the French presidential election is perhaps the biggest harbinger of this. Mr. Hollande has proposed to raise income tax on the rich to 75.0%, while promising to renegotiate the Eurozone fiscal union to emphasise growth. This is just the kind of uncertainty the market hates, and coming from a man who looks set to become President of the 6th largest economy in the world, bodes ill for euro confidence. We find out if Mr. Hollande will occupy the Elysée Palace in less than a fortnight.

 

Looking ahead: 

As I mention, I can see the pound gaining back its lost ground in the short term, as official Eurozone data next week puts the continent in recession too. Furthermore the political travails in Europe could weaken the common currency too, while George Osborne at least looks set to stick to his cuts agenda. That will favour the pound also. Of course, given this surprise double dip this morning, it really is difficult to predict where the pound might go next.

I hope this post has been of interest. I will of course return with my next update next week. Of course, if you have any questions about transferring money abroad in the meantime, don’t hesitate to leave a comment below. I’ll get back to you as soon as I can.

Peter Lavelle

Foreign Exchange Specialist Pure FX

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Category: Currency news

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