Pound undermined by worse than expected GDP figures

The pound weakened against the dollar on Friday, wiping out much of the bounce it enjoyed the day before. In early trading, the pound lost ground against the dollar following an article in The Daily Telegraph suggesting the UK could lose its AAA credit rating after rating agencies outlined their concerns over the UK’s ability to service its public debt. If the UK were to suffer the embarrassment of having its rating downgraded the cost of sovereign borrowing would increase, making future tax and interest rate rises more likely. The pound then suffered furthered losses against the greenback after figures released by the Office of National Statistics showed the UK economy had shrunk 1.9% in the first three months of 2009. The figure was much worse than the 1.5% contraction analysts had predicted, and represented the biggest decline in GDP since the third quarter of 1979. It was the UK’s third consecutive quarter of negative GDP growth, confirming that the country remains mired in deep recession. The worse-than-expected figures cast fresh doubt over UK Chancellor Alistair Darling’s optimistic growth forecasts announced in the budget last Wednesday, and therefore many investors sold sterling in favour of the perceived safe-haven of the US dollar.

Later in the day, however, better-than-expected US Durable Goods Orders data, down at -0.8% rather than the predicted -1.4%, sparked a rally for the pound as investors’ appetite for risk improved. The pound’s recovery was also aided by overseas central banks and model funds buying into the currency as part of their regular reserves management. However, worse-than-expected housing data eventually cancelled out sterling’s gains as investors realised the US economy may yet have further to contract. Month-on-month New Home data released by the US Census Bureau revealed that sales of single-family homes in March decreased by 0.6% to a seasonally adjusted annual rate of 356,000 in comparison to February. The decline was the fifth in six months and added to investor wariness that the all-important US housing market may yet have further to fall. This news, together with other data released during the day, meant the pound finished down against the dollar at $1.4676, having started the day at $1.4721.

In early trading today, the pound has weakened markedly against the dollar as investors brace themselves ahead of the release of important UK Nationwide House Price data, expected to show a fall of 15.8% Year-on-Year for April. There are no major announcements in the US today.