FT: Broad losses for sterling as UK returns to recession
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The pound sank against other major currencies on Wednesday after data revealed the size of the UK’s gross domestic product shrank for the second successive quarter, sending the country back into recession.
The decline of 0.2 per cent in GDP for the first quarter confounded expectations of growth of 0.1 per cent.
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It dented confidence in sterling and sent it falling in value right across the board, ending a recent period of strength.
The pound fell 0.3 per cent against the dollar to $1.6078. It lost 0.6 per cent against the euro to reach its lowest level in a week at €1.2158 and fell 0.5 per cent against the Swiss franc to SFr1.4608. It dropped 0.4 per cent against the yen to Y130.47.
“Stagflation is never good for a currency, especially as the UK economy is going through a long-term period of deleveraging,” said Valentin Marinov at Citigroup. He warned the pound could come under further pressure against the dollar later in the day, with markets awaiting a signal from the Federal Reserve on the prospect of further quantitative easing in the US.
The pound has benefited from haven demand in Europe of late, hitting a 20-month high against the euro earlier this week in response to concerns over the political situation in the Netherlands and France.
Investment bankers have warned clients to be wary of the recent rally in the pound, however, with some reporting that appetite for sterling was tentative this week ahead of the GDP figures.
Some foreign exchange analysts said that the relative attractiveness of the pound versus the euro could still persist.
“With the UK[‘s credit rating] remaining [at] AAA I think the bigger issue is that despite negative growth, buying gilts is still more attractive than buying European paper,” said Geoffrey Kendrick at Nomura.
UBS said it expected positive revisions on the first quarter GDP figures when the numbers were released again.
“The pound has enjoyed a strong few weeks so some consolidation is inevitable,” said Chris Walker, foreign exchange analyst at UBS.
“Positioning is slightly stretched so the sharp sell-off from today’s numbers is to be expected. However, we remain relatively constructive versus the euro.”
