Pound Dips Lower on Weak Consumer Confidence

THE TAKEAWAY: UK consumer confidence falls to early 2009 lows > Data reflects high inflation and anemic growth > Pound lower

The British Pound fell after a GfK survey showed that consumer confidence declined to a two-and-a-half year low. Heading into the data release, the Cable had already been correcting from a broad rally of risk-assets following the EU debt agreement.

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The GfK Consumer Survey fell to -32 in October from -30 in the previous month, missing expectations that the gauge would remain unchanged. This month’s reading represents the lowest level since February 2009. The fall in sentiment was driven by a decline in Britons’ assessment of the domestic economic situation in both the past 12 months and over the coming year. A gauge measuring perceptions of climate for major purchases also dropped from -28 to -32.

Consumer sentiment in the UK has been dampened as annual inflation tops 5 percent, energy and utility prices continue to surge, and as Prime Minister David Cameron’s coalition government proceeds with austerity measures to cut the budget deficit. With both stubbornly high inflation readings and weak growth – the economy barely grew at a 0.1 percent pace in the 2nd quarter – the UK economy appears increasingly at risk of a prolonged period of stagflation.

On the currency front, in the face of the bleak growth outlook, the Bank of England has shown no sign of deviating from its dovish stance. Minutes from the latest MPC meeting showed unanimity among Committee members in approving a 75 billion-Pound expansion of the BoE’s Asset Purchase Facility and in maintaining the benchmark interest rate at 0.5 percent. With little deviation expected in monetary policy, the Pound will remain subject to risk sentiment in connection to how well the Eurozone defines further details of the Oct. 26-27 agreement.