UK data is coming back to haunt the pound. The debt crisis has taken the edge off market responses to UK data in recent months and this week has been no different. Still, sterling has come off an eighth-month high against the euro and a nine-week high against the US dollar.
Today’s UK labour market figures revealed that the domestic unemployment rate rose to a 15-year high last month. The Quarterly Inflation Report from the Bank of England has also cut UK growth prospects, indicating that there will be little to no expansion in the first half of 2012. Further quantitative easing looks likely then, which represents a downside risk to sterling.
Tomorrow’s session could also be a tricky one for sterling, with UK retail sales for October likely to show negative growth. The UK economy is in dire straits, there is no doubt about it. Without economic growth we will struggle to maintain the market’s, and the rating agencies’ faith that we have a handle on our debt situation. Then the UK will come under pressure just as core economies such as France and Austria have this week.
Nonetheless, there is no growth in the eurozone and little in the US. The debt situation is weighing on sentiment and activity across the globe, so the UK isn’t alone in its predicament and at least we are borrowing cheaply, for now.
We see sterling struggling against the US dollar, based on continuing appetite for safe-haven assets. Likewise we should see sterling push for fresh multi-month highs against the euro before long, but his may have to wait until next week.
Richard Driver
Senior Analyst – Caxton FX
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