Tuesday 25th May was the release date for GDP figures for the United Kingdom. For each economic Quarter there are three sets of figures released. The Preliminary figures are the most significant in terms of their impact on the market and provide an assessment of approximately 40% of those sectors contributing to GDP.
The revised and final GDP figures take into account the whole economy, so have the potential to be rounded up or down depending on how broad reaching growth or contraction is. The figures provide investors, institutions, governments and economists with an assessment of the state of our economic health. Perhaps alarmingly the level of growth since the figures released at the beginning of the year has not increased.
-- ADVERTISEMENT --
With growth staying at the same rate (0.2 – 0.3%), concerns are brewing over the value of the pound in the light of the significant and sustained cuts the new coalition government is required to make to tackle the budget deficit. Admittedly the release of these revised figures was eclipsed by other economic and financial concerns in Europe, but the have prompted pundits and analysts to make more moderate forecasts on the UK growth over the coming year.
Selling stocks leaves investors with cash, and the ‘safe haven’ currency to hold in an uncertain market is dollar. This explains the considerable gains made by the US dollar since 5th May. Selling European equities and securities as a result of the uncertainty of the Greek debt situation means that investors are free to reinvest in other markets. Typically they will choose between UK markets and US markets because of the easy access to liquidity.
This means that trouble in Europe strengthens the two other major currency most attractive to the responsible or risk averse investor. It is not a certainty that the pound will strengthen on the back of a sell off in European stocks and bonds; however, despite our own debt obligations, the UK is not as high risk as the Eurozone at large, and therefore in the shorter term the pound is a slightly more attractive trading vehicle.
Although temporary, the measure taken by the German Chancellor with regards to selling European bonds has forced the hand of ‘short sellers’ and limited the activities of vicious currency speculators. To a certain extent Sterling remains under pressure against both Euro and US dollar precisely because their respective economies are expanding more rapidly than ours. It is encouraging that we are above the 1.13 level, but the 1.18’s seen at the beginning of May do not show optimism for the pound, but rather the markets shock at the state of Euro zone’s sovereign debt exposure.
In May the Bank of England again voted unanimously in favour of keeping interest rates on hold and remained cautiously optimistic that the economic recovery would pick up pace in the latter part of this year and into next. With events like the interest rate decision the market will typically ‘price in’ a predictable decision meaning that the rate is not particularly affected. The important part of this rate decision comes in the form of the Monetary Policy Committee’s minutes of their rate decision meeting, because this allows trading to asses the committee’s reasons for holding the rate, and thereby make their predictions on when rates might be increased.
The threat of an increase usually causes a currency to appreciate in value, so sterling rises. Low interest rates are good for borrowers, but, banks are less keen to lend. To incentivize banks to lend, which induces investment that improve the value of a currency, rates need to go up, but individuals and smaller business cant afford to borrow at the levels the bank will set, which is why growth has not increased as much as one would expect, and the pound remains relatively less attractive than Euro or Dollar to the foreign investor.
The former Chancellor of the Exchequer, Alistair Darling, consistently maintained that the recovery would be gradual and long. This is arguably his greatest legacy to British people. Aside from being correct, he was trying to reign in our expectations. Sterling is unlikely to race towards the 1.20 mark, especially given the most recent economic figures for the end of the May.
It has been suggested that 1.20 or above might be reached by Q3 of 2010, but the same was said of 1.24 in August of 2009, so we must simply hold our breath to see which areas of the economy can weather the new raft of cuts and still expand.
Cuts are our greatest threat in the short term, but when considering a long term strategy for a sustained recovery we must acknowledge the speed with which the coalition government has kept to their pledge.
Please feel free to contact me at [email protected] and I will reply to all your questions promptly.