Forex News

Sterling falters on UK recession, outlook still upbeat

26 April, 2012 - Reuters
Updates prices, adds quote)
  • Sterling drops after UK unexpectedly enters recession
  • Pound retreats from 7-1/2 month high vs dollar
  • But analysts say further sterling strength likely
  • By Anirban Nag

    LONDON, April 25 (Reuters) - Sterling retreated from a 7-1/2 month high against the dollar and fell against the euro on Wednesday after data showed the UK economy had slid back into recession, keeping alive the chances of more monetary stimulus from the Bank of England.

    But losses were likely to be limited by the view that Britain still has a better outlook than the neighboring euro zone and by expectations that U.S. Federal Reserve chief Ben Bernanke will strike a dovish tone when he speaks later on Wednesday.

    Traders reported sovereign investors buying the pound on dips.

    Data showed Britain's economy slipped back into recession as output contracted by 0.2 percent in the first three months of this year.

    Sterling was last down 0.2 on the day at $1.6116, having dropped to a session low of $1.6082 after the GDP release. It traded well below the peak of $1.6172 struck earlier in the day, its highest level since early September. Traders cited stop loss orders below $1.6080.

    The euro rose to a session high of 82.22 pence from around 81.87 pence before the data release, with traders saying offers above 82.20 pence were likely to check gains.

    "The pound had an immediate knee-jerk lurch lower after the GDP release. Since the pound's recent strength was fuelled by expectations of a hawkish BOE, the disappointing Q1 growth data could weigh on the pound fairly heavily," said Kathleen Brooks, research director at Forex.com.

    The central bank's stimulus program tends to be negative for the currency as it involves flooding the economy with billions of pounds of newly-created money.

    Earlier this week the pound hit a 20-month high against the euro of 81.435 and a 2-1/2 year peak on a trade-weighted basket of currencies as investors priced out the likelihood of more quantitative easing by the BoE.

    Some analysts said market players were still more focused on forward looking economic indicators.

    The pound gained support from a survey from the Confederation of British Industry showing quarterly business situation balance rose to +22 in April from -25 in January, even though factory orders growth remained steady.

    "While Q1 has not been particularly good for the UK the BoE has indicated they are willing to look through this quarter and look forward. The market seems to be doing something similar," said Michael Sneyd, FX strategist at BNP Paribas.

    BNP Paribas forecast euro/sterling to fall to 80 pence by the middle of the year, and the mid-70s by the end of 2013.

    FED FOCUS

    The next focus will be the conclusion of the Federal Open Market Committee's two-day meeting. The Fed is expected to raise its growth forecasts for the U.S. economy, but Chairman Ben Bernanke is unlikely to signal a tightening of U.S. monetary policy given unemployment remains stubbornly high.

    The Bank of Japan is also likely to expand its asset purchase programme later this week, while expectations are that the European Central Bank will keep monetary policy loose given the threat of recession in the euro zone.

    In such an environment sterling would see demand from long-term investors, given BoE policymakers have been flagging inflation risks and a less dovish bias.

    Sterling will also be buoyed by safe-haven inflows into UK gilts as political uncertainty and growing concerns about the outlook for euro zone peripheral countries sour sentiment towards the euro.

    Some investors who took profit on the pound following the GDP data said they still expected longer-term strength against the euro.

    "An unexpectedly weak UK GDP report for Q1 has tempered expectations the economy will outperform. We are taking profit on our short euro/sterling short position," said Ned Rumpeltin, head of G-10 FX strategy at Standard Chartered.

    "Fundamentals still imply further medium-term declines, however, we will look to re-enter at better levels."

    Additional reporting by Nia Williams; Editing by Toby Chopra)

    Copyright Thomson Reuters 2012. All rights reserved.

    The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.

    Currency Converter


    Market Rate For information purposes only. Terms of Use
    For details, see My FX Dashboard

    For UKForex’s customer rate
    Log In or Register Now
    Rate: 1.6048
    =
    Rate: 0.6232
    =

    Register Free

    Send money overseas at better rates than the banks.


    Get our free commentary



    RSS Follow Google Plus Follow on LinkedIn

    Get free rate alerts

    /
     
    Choose currency pair and enter the exchange rate. An alert will be triggered when the exchange rate is reached and an email will be sent to you. You can unsubscribe any time and your email address is safe – see our Privacy Policy.

    NOTE: These rates are for informational purposes only

    IMPORTANT: Use of this website is subject to the Website Terms. Use of the Services of the UKForex Limited is subject to the Client Agreement. Nothing on this website constitutes or should be construed as financial advice. This information has been prepared for distribution over the internet and without taking into account the investment objectives, financial situation and particular needs of any particular person. UKForex Limited makes no recommendations as to the merits of any financial product referred to in this website, emails or its related websites.

    DISCLAIMER: UKForex makes no warranty, express or implied, concerning the suitability, completeness, quality or exactness of the information and models provided in this web site. Read full disclaimer.

    UKForex provides foreign currency transfer services to private clients and business customers. Use our free currency converter, exchange rate charts, economic calendar, in-depth currency news and updates and benefit from competitive exchange rates and outstanding customer service.

    UKForex is regulated by the Financial Conduct Authority (FRN: 521566) for the provision of payment services.

    Money Laundering Regulation Number (MSB): 12219180. Issued by HM Revenue & Customs (HMRC)
    Read our Money Laundering Statement