UK GDP points to recession and MPC minutes point to part of the solution

UK GDP figure disappointing

This morning was a big one for the UK economy and sterling. The UK GDP figure for the final quarter of 2011 came in at -0.2%, whilst the minutes from the MPC's meeting a fortnight ago indicated the BoE's QE programme will be expanded next month.

This morning’s UK GDP figure is certainly disappointing, but with sterling gaining after the release it is quite obvious the market was positioning itself for an even worse showing.

The UK's services sector has just about kept its head above water, but manufacturing and construction has been a letdown and the labour market is still in the doldrums. Yesterday’s IMF downgrade of UK growth prospects this year has certainly been vindicated.

The data clearly strengthens the argument that the UK economy is heading into tougher times. With the eurozone debt crisis likely to weigh on European and domestic growth for many more months to come, the UK looks likely to enter a technical recession.

So how can UK growth be boosted?

Well, the Bank of England is already trying to do so through its 275B quantitative easing programme. Today's MPC minutes reveal that the nine-member committee is ready to step it up again next month.

Adam Posen will be feeling particularly smug right now - he has staked his reputation on the UK economy's need for more QE and his colleagues in the MPC have had to come round to his way of thinking.

It was no surprise to see all nine policymakers voting to leave the current QE programme on hold. February has long been earmarked as the month to step up asset-purchases. High inflation looks as if it will no longer be an issue in 2012 (UK inflation dropped from 4.8% to 4.2% in December alone); the UK economy needs more from the Bank of England printing presses.

However, it does not look as if a decision to expand QE next month will be unanimous, the minutes include comments such as- "the risks to inflation were more finely balanced and it was less clear that inflation would fall below the target in the medium term." The risks of UK inflation undershooting the BoE's 2.0% target are a key motivation for QE. Nonetheless, this morning’s poor GDP figure highlights the UK economy's dire need for help and we still bet this will come in February. .

Richard Driver
Analyst – Caxton FX
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Morning Report

Richard Driver, Analyst  Greece was asked to provide a written commitment to enact the reforms that are required for the country to be granted its second bailout (which, it is hoped, will avoid any u-turn as a result of upcoming Greek elections). It is quite clear that stronger eurozone states are losing their patience with Greece; specifically its reforms have been insufficient. Today’s session brings the all-important UK GDP figure for the final quarter of 2011; a 0.1 - 0.2% contraction is expected – sterling’s fate in the short-term really depends on where the figure comes in with respect to this expectation.
STERLING/EURO: This pair continued to trade within a fairly narrow range, with levels just above €1.19 providing some decent support. We saw some better than anticipated public borrowing figures out of the UK yesterday, though sterling failed to capitalise given that the headlines focused on the fact that UK public debt has now hit one trillion pounds. A poor UK GDP figure has been priced in by the market by now, but an undershoot will surely weigh on sterling as investors fear recession. The MPC minutes are also released this morning and given Mervyn King’s speech last night, which alluded to the likelihood of further QE, we can expect further dovish language from today’s MPC release. More QE in February has been expected for a while now, so this should not weigh on sterling too badly. For now, this pair trades at €1.1950.	FORECAST
STERLING/US DOLLAR: Sterling ticked higher against the US dollar, but faces plenty of downside risks this morning. The case for safe-haven currencies in the longer-term was bolstered yesterday by an understandably negative assessment of the global economic outlook from the International Monetary Fund. The IMF cut its outlook for global growth in 2012 from 4.0% to 3.3%. Ominously, the IMF cut its UK forecasts for this year from 1.6% to 0.6%. This evening brings the all-important US Federal Reserve statement and press conference. Bernanke will be revealing the projections of a Fed rate hikes by the Fed policymakers, which could cause some interesting moves as investors revise their positions. As far as rate hikes in the US are concerned, we are looking beyond mid-2012. This pair is trading at a comfortable $1.56 this morning, further upside again looks limited.	FORECAST
EURO/US DOLLAR: The euro continues to trade above the $1.30 level despite a sell-off in European stocks, helped by another positive Spanish debt auction. Spain enjoyed another successful debt auction yesterday and the euro could well benefit from a positive German business climate survey this morning. Germany’s economy is showing signs that it may avoid a recession after all, which of course brightens the picture in the eurozone as a whole, though it looks as if the region will fall back in to recession regardless. The euro is trading marginally above $1.30 this morning and may find further support if the Fed reveals that interest rates will remain at record lows for even longer than expected.	FORECAST
STERLING/AUSTRALIAN DOLLAR: Australian inflation data provided the aussie dollar with another push in the right direction. Whilst Australian CPI was unchanged from the fourth quarter of 2011, core Australian inflation came in above expectation to trigger some positivity to the aussie dollar. The Reserve Bank of Australia is nonetheless expected to cut rates to 4.0% next month, not least because the strength of the currency will be hurting the Australian economy. Sterling is trading back down at the familiar 1.48 level and risks look to be skewed to the downside for today.	FORECAST
STERLING/NEW ZEALAND DOLLAR: Further gains in Asian stocks and sterling weakness this morning has seen this pair lose ground. The Nikkei share index gained by another percent last night, evidence of further regional risk appetite. There was some decent NZ manufacturing data last night and credit card spending also ticked up. Moves in the kiwi dollar are likely to be dictated by tonight’s Fed statement and press conference, but the Reserve Bank of New Zealand’s rate statement will still be important beyond the very short-term. The central bank is expected to leave rates on hold at 2.5%. This pair trades at 1.92 for now.	FORECAST
STERLING/CANADIAN DOLLAR: This pair was range-bound despite some stronger than expected Canadian retail sales data. Canadian retail sales data came in higher than anticipated but this was all just a prelude to tonight’s crucial US Federal Reserve meeting. Expectations for a low UK GDP figure are hurting the pound this morning, but it can just as easily rebound if the data provides an upside surprise. Sterling continues to trade in the 1.57-58 area, as it has done all week. All eyes are on the Fed for major moves in this pair.	FORECAST
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