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British Pound Slides as NIESR GDP Estimate for June Shows Contraction

British Pound Slides as NIESR GDP Estimate for June Shows Contraction

Christopher Vecchio, CFA, Senior Strategist

THE TAKEAWAY: UK NIESR GDP Estimate (JUN) > -0.2% from +0.1% > GBPUSD BEARISH

The British economy continues to be mired in a recession, according to the latest growth estimate from the National Institute of Economic and Social Research. The June NIESR GDP estimate fell back to -0.2% from +0.1% in May, bucking what had hopefully been a rebound in growth prospects. This is now the fifth month this year (out of six readings) that has shown that the UK economy has contracted.

The Bank of England is well-aware of the British economy’s struggles, which prompted policymakers to announce a new Asset Purchase Target of £375 billion at their monthly rate decision last Thursday. Certainly, it appears that the British economy is moving away from the more dangerous stagflationary state (market by low growth, high inflation, and high unemployment) to a more easily addressable recession. Still, loose monetary policy has proven ineffective around the globe recently – especially among the world’s more advanced economies – and we thus expect a higher APT to be announced by the Bank of England in the coming months.

GBPUSD 1-minute Chart: July 10, 2012

British_Pound_Slides_as_NIESR_GDP_Estimate_for_June_Shows_Contraction_body_Picture_2.png, British Pound Slides as NIESR GDP Estimate for June Shows Contraction

Charts Created using Marketscope – Prepared by Christopher Vecchio

In the wake of the news, the British Pound depreciated across the board as traders priced in the likelihood of more easing from the Bank of England in response to an increasingly slowing economy. The GBPUSD slid from 1.5523 to as low as 1.5598 in the minutes after the release, before rebounding to 1.5508, at the time this report was written. Similar price action was observed in the GBPJPY, which fell from 123.32 to as low as 123.15.

--- Written by Christopher Vecchio, Currency Analyst

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