Pound loses ground to euro following worse than expected GDP

The pound weakened against the euro on Friday, as improved investor confidence in the eurozone increased appetite for the single currency. In Germany, the IFO Business Climate index survey showed a better-than-expected rise to 83.7 in April, up from 82.2 the previous month, fuelling investor confidence that the eurozone may be coming tentatively out of recession. In the UK, GDP figures released by the Office of National Statistics showing that the economy had shrunk by 1.9% in the first quarter of 2009 further called into question Chancellor Alistair Darling’s optimistic growth forecasts, announced in his budget last Wednesday. The Chancellor predicted that the UK economy would grow by 1.25% next year and 3.5% in 2011, but the worse-than-expected GDP data cast fresh doubt over his predictions. It represented the biggest quarterly decline in the UK’s GDP in thirty years, and the country’s third consecutive quarter of negative growth, prompting investors to dump sterling as their confidence that the UK may be coming out of recession dwindled. There was also continued doubt in the City over the credibility of the Chancellor’s new 50% tax rate on those earning £150,000 or more, with many fearing that the top financial services talent will look elsewhere to ply their trade. With the UK economy so dependent on the banking and financial services industry, some analysts worried over the long-term implications of such a tax rise, potentially making it much harder for the UK to get out of recession going forward. As a result of these investor jitters, together with improved investor sentiment in the eurozone, sterling weakened against the single currency over the day, finishing at 1.1082, down from 1.1198 at the start of the session.

In early trading today, the pound has continued to weaken against the euro ahead of important housing data released later today. The Nationwide Housing Price figures are expected to report a further 15.8% fall Year-on-Year for April, fuelling fears that the UK housing market may have some way to go before it bottoms out. In the eurozone, President of the European Central Bank Jean Claude Trichet’s speech at 17.45 BST will be of particular importance to investors as he may give some indication of what steps the bank intends to take at the next meeting.