It was a mixed session for the pound, as growth revisions and Prime Minister Gordon Brown’s calls for UK banks to free up credit reminded the market of the nation’s economic and financial bind. From the docket, the second reading of third quarter UK GDP fell in line with expectations at a rate of -0.5 percent, coming one step closer to confirming that the economy is experiencing its worst slowdown since 1990-1991 (the final results will not be available until December 23).
This contraction comes on the tails of a complete stagnation during the second quarter, and was the result of a combination of restrictive monetary policy in the UK through mid-2008 along with the collapse of the housing sector and weakening domestic and foreign demand. In fact, a breakdown of the GDP report shows that private consumption fell 0.2 percent (the biggest slump contraction since 1995) while exports slumped 0.3 percent. And, in light of this data, Credit Suisse overnight index swaps are fully pricing in a 75bp cut by the Bank of England next week. Upcoming economic indicators may add to this sentiment with Thursday’s 2:00 ET release of Nationwide home price index anticipated to fall for the 13th consecutive month and drag the annual rate down to at least a 16-year low of -15.1, as records began in 1992. With the Governor King and his fellow MPC members scheduled to deliberate on monetary policy next Thursday, we will likely see interest rate speculation have a leveraged influence over the sterling’s price action.