Bleak economic outlook undermines sterling

Sterling reversed much of Monday’s gains yesterday, as investors remain wary about the bleak economic outlook facing the UK and about the likelihood of the Bank of England using quantitative easing to rejuvenate the economy. Bank of England policymaker, Andrew Sentance, confirmed that quantitative easing was necessary in the UK to get the economy back on track. These comments came alongside another bleak housing report from the British Bankers Association, which showed that mortgage approvals are down 43% in January compared to the same month last year. Figures released by the Office of National Statistics also showed that business investments fell at the fastest annual rate since 1991 in the fourth quarter of last year.

In early trading today, sterling is up against the single currency on improved stock market sentiment, following comments on both sides of the Atlantic that US and British banks will not be fully nationalised going forward.

Germany has released its GDP data as expected this morning, revealing a 2.1% decline in their GDP in the fourth quarter of 2008. Later this morning, the UK releases GDP figures.

GBPEUR: 1 week chart. Click on graph to enlarge.