daily brief

British Pound Falls Further as Growth Figures Disappoint

Tuesday, 23 December 2008 09:56:07 GMT  |  David Song, Currency Analyst

The British pound fell for the fifth consecutive session to cross below 1.4800 as the final GDP reading for the third quarter was revised down to -0.6% from an initial reading of -0.5%. Deteriorating fundamentals paired with mounting growth fears have certainly taken a toll on Cable.

Talking Points
• Japanese Yen: Holds 90.00
• Pound: GDP Contracts 0.6% in 3Q, GBPUSD Slips Below 1.4800
• Euro: Pares Gains, Falls Below 1.4000
• US Dollar: GDP, Housing Data on Tap

British Pound Falls Further as Growth Figures Disappoint

The British pound fell for the fifth consecutive session to cross below 1.4800 as the final GDP reading for the third quarter was revised down to -0.6% from an initial reading of -0.5%. Deteriorating fundamentals paired with mounting growth fears have certainly taken a toll on Cable, and the currency is likely to face increased selling pressures over the coming months as market participants expect the Bank of England to ease policy further as growth prospects deteriorate at a rapid pace. As the market remains thin ahead of the New Year, increased volatility could drag the pound lower over the week.

Meanwhile, loans for home purchases in the U.K. fell to its lowest level since 1994 as the BBA index slipped to 17,773 from a revised reading of 20,767 in October, and conditions are likely to get worse as credit conditions remain far from normal. A separate report showed that service-based activity in the U.K. weakened further in October as the index of services fell another 0.2% following the 0.5% contraction in the previous month. Moreover, fading demands from home and abroad has certainly taken a toll on Europe’s second largest economy as the currency account deficit widened to -7.7B from a revised reading of -6.4B in the second quarter, and trade conditions are likely to deteriorate further as the major economies around the world head into a recession.

The Euro pared gains after reaching an intraday high of 1.4023, and slipped below 1.4000 against the dollar despite an unexpected improvement in the current account. The current account deficit unexpectedly narrowed to -6.4B from a revised reading of -8.8B in September on the back of lower oil prices, but conditions are likely to get worse as demands from the global economy falter. An empty European calendar for the remainder of the week will leave the Euro at the mercy of risk trends, and may face increased selling pressures as the flight to quality continues.

The final 3Q GDP reading for the US is unlikely to have an impact on trading as market participants expect the annualized growth figure to hold steady at -0.5%, but any revisions to the more important components of the report could spark increased volatility as trading volume in the markets remain thin. Nevertheless, the slew of housing data is likely to drive price action the greenback as new home sales are expected to fall another 3.6%, while existing home sales are anticipated to drop 1.0% from the previous month. In addition, the home price index is also projected to fall 1.3% for the second consecutive month, which continues to reflect a dour outlook for the world’s largest economy.

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To discuss this report contact John Rivera, Currency Analyst: jrivera@fxcm.com

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