Sterling continues to
decline ahead of key UK GDP figure
We take no pleasure in reporting yet more bad news
from the UK economy, which reported a 0.1% contraction in retail sales in
December. There is unlikely to be much of a let-up for the pound, with
Wednesday’s UK labour market not expected to provide much inspiration. Also
released on Wednesday are the MPC minutes from the rate-setting committee’s
meeting a fortnight ago. We are expecting David Miles to remain the lone dove
in the MPC by voting for more QE. The other eight voters are likely to be
convinced to keep their powder dry by persistently high inflation and further
evidence of improved credit conditions due to the Funding for Lending Scheme.
Weak growth figures may have convinced one or two to vote for QE however.
Sterling will struggle to benefit much from the
minutes, with Friday’s UK GDP figure for Q4 2012 likely to be very
disappointing indeed. The consensus market forecast rests at -0.2% but we are
inclined to believe that a more significant contraction will be confirmed, with
a -0.4% showing by no means beyond the realms of possibility. More bad news is
in store for the pound in the short-term then. However, with sentiment so weak
towards the UK economy now, we increasingly have to question just how much more
damage bad data can do to the pound.
Indeed, broadly weak government borrowing and CBI
industrial order expectations data have not left a mark on sterling today. As a
result of the former figure, speculation has inevitably been boosted that the
rating agencies are circling the UK’s triple-A credit rating. We must admit, a
downgrade will surely be dealt in the coming weeks. What is not certain is how
much this would affect the pound; the UK has never suffered a rating downgrade
and as such we are in uncharted territory. We know from the example of the US
downgrade last summer that the dollar emerged unscathed, but this may not
necessarily be true of the pound.
News
from Europe generally positive though concerns still linger
We have seen a very impressive German economic
sentiment survey emerge today, which has given the euro further support.
However, the accompanying press release points to only moderate economic growth
from Germany in 2013 and we certainly don’t have high hopes for much more than
0.3% GDP growth as waning demand from eurozone partners continues to bite
Germany’s exporters.
Thursday morning brings the monthly installment of
eurozone PMI growth figures. Markit - the compilers of the PMI surveys - has
claimed that the “worst is over” with respect to eurozone growth and
expectations are for modest improvements across the board, though the
indicators remain deep in recession territory.
End of week forecast
|
GBP /
EUR
|
1.1800
|
|
GBP /
USD
|
1.5770
|
|
EUR /
USD
|
1.3400
|
|
GBP /
AUD
|
1.4900
|
|
|
|
Sterling has regained the €1.19 level this morning but
we doubt the market is done with the downside yet. The 85p EUR/GBP level
remains very much in sight, which amounts to €1.1765.
Sterling is looking equally vulnerable against the US
dollar, having fallen through some key levels. $1.5770 is the next big support
level for GBP/USD. Arguably, the best sterling can hope for is that the market
sees fit to take profit on betting against it of late, fearful of an upside
surprise within Friday’s UK GDP figure.
Richard Driver
Currency Analyst
Caxton FX
