Following the news that the UK economy contracted by -0.2% in the first 3 months of 2012, strong Sterling currency forecasts were halted and the Pound lost out to its major rivals, as investors were spooked by the headline of a double-dip recession – something not seen since the 1970’s.
The Pound to Euro exchange rate went down 0.40%
The Pound to US Dollar exchange rate went down 0.30%
The Pound to Australian Dollar exchange rate went down 0.26%
The Pound to New Zealand Dollar exchange rate went down 0.22%
The Pound to Canadian Dollar exchange rate went down 0.50%
GDP fell by -0.3% in Q4 2011 and by -0.2% in Q1 2012, signalling a technical recession – defined as two consecutive quarters of negative growth. A sharp decline in Construction Output was cited as a defining factor in the weak GDP figure. The shock result has put pressure on Prime Minister David Cameron and Chancellor George Osborne, whose excessive austerity measures have not proven effective at lifting the country back into growth.
The Pound’s strength over the past week has largely been driven by the Bank of England’s less dovish stance which stemmed fears of further quantitative easing. And although today’s GDP report has dented Sterling’s capacity to surge, it shouldn’t be enough to cause a BoE U-turn – in short the Pound should still be safe from an increase to the asset purchasing scheme in May.
The CBI quarterly measure of business confidence defied the GDP results and showed an improvement from -25 in January to +22 in April. Some economists have argued against the accuracy of the Office for National Statistics’ figures, and feel that Q1 GDP will be revised upwards heavily at some point in the future.
John Cridland of CBI said: “The weakness of the services sector does not tally closely with a range of survey indicators suggesting that the sector has been picking up through the first quarter.”
And Andrew Goodwin of Ernst and Young said that: “The culture of risk aversion which is preventing any sustainable recovery from taking off,” is directly fuelled by depressed investor confidence, which is often caused by inaccurate releases such as this.
Considering the initial shock when the figure was released the Pound has managed to stay afloat relatively well and avoided any mortal wounds. Future currency predictions are wary of the fact that the UK is now perceived to be in a double-dip recession, but also carry some optimism as to the underlying robustness of the economy. This confidence is reflected in the muted nature of Sterling’s losses today; it could have been a lot worse.
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