Pound Sinks Further As GDP Contracts The Most Since 1980, Euro Follows Suit

Talking Points
• Japanese Yen: Found Support at 88.0
• Pound: GDP Confirms Recession
• Euro: PMI Unexpectedly Rises
• US Dollar: Risk Winds To Dictate Sentiment

Pound Sinks Further As GDP Contracts The Most Since 1980, Euro Follows Suit

The Pound sank below support at 1.3685 to a low of 1.3526 as U.K. GDP showed that the current recession is deeper than expected. The preliminary quarterly reading of a 1.5% contraction was weaker than the estimate of 1.2% and the lowest since 1980 which dragged the annualized rate to -1.8%. The data confirmed that the country is in a recession as the 4Q contraction followed a 0.6% decline the quarter before. Despite the slumping economy, U.K. retail sales unexpectedly rose 1.6% in December as Britons took advantage of discounts during the holiday with a 28.5% increase in apparel sales.

The increase in consumer consumption may be an aberration as the deepening recession will add to the current weakness in the labor market and recent banking troubles should weigh on sentiment. The 0.4% drop in the service sector was the fifth straight decline brining it to the weakest levels since the 1970’s. The weakness in the sector which accounts for more than 75% of the economy may force the BoE to employ a zero interest policy as it tries to prevent depression like conditions. The Pound has found support ahead if 1.3500 but with little technical support and bearish sentiment, we could see 1.3000 tested before long.

Forex traders sold off the Euro as well, sending the single currency to as low as 1.2790 as risk aversion and the declining growth picture in the region fed the bearish sentiment. Yet, the PMI reading showed a slight improvement from last month’s all-time low of 38.2 with a reading of 38.5, on the back of stimulus plans and interest rate cuts. However, both the manufacturing and service sectors remained in contraction for an eighth straight month. Markets have started to price in more interest rate cuts from the ECB with Credit Suisse overnight index swaps calling for 46 bps worth of cuts over the next twelve months, which will remain a weighing factor for the Euro. Despite this the currency has yet to approach the November low of 1.2329 as 1.2800 has provided support.

The weakness in the equity markets may continue to add support for the dollar as safe-haven flows continue to target U.S> treasury’s. Yesterday’s sell off in the U.S. has carried through to Asia and Europe during overnight trading and weakening fundamental data in those areas have lowered expectations for global growth. The U.S. economic calendar is empty but corporate earnings should dictate sentiment again today with GE reporting. It was Microsoft’s dour earnings report and announcement that they were cutting 5,000 jobs that sparked the current bout of bearish sentiment. U.S. futures have been trading down over 150 points most of the overnight which is signaling another down day for U.S. stocks and more bullish dollar sentiment.

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Related Articles:
Forex Sentiment Forecasts further Japanese Yen and US Dollar Strength
U.K. GDP Contracts More than Expected, Further Weakness Ahead


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