Pound Falls As U.K. GDP Confirms Recession, Will Thanksgiving Holiday Bring Volatility?

The second reading of U.K. GDP confirmed that the economy is in a recession as the initial print of a 0.5% decline was confirmed. Yet, the personal consumption component was revised lower to 0.2% from 0.1% which was the biggest decline since 1995. The Pound would weaken on the news dropping over 80 bps from its session high of 1.5444. The Sterling before the release was starting to pare its losses from the Asian session which saw it fall to as low as 1.5305. The continuation of declining domestic growth for the U.K. may lead to a prolonged recession as it also saw demand for its goods decline. Indeed, exports fell 0.3% for the third quarter as the credit crisis has weighed on global demand. There was hope that the weakening Sterling would bolster foreign demand. The BoE is expected continue their aggressive easing policy in order to soften the landing of the economy which will remain a weighing factor for the Cable. However, recent price action has seen some technical support and according to our Senior Currency Strategist Jamie Saettele “significant resistance does not begin until 1.60”

After a brief breakout yesterday the Euro has returned back below the 1.300 price level which may signal that the 1.2400 – 1.300 range is still intact. This may present an opportunity to for trades to employ range strategies in their trading as the single currency may continue to trade sideways for some time. President Trichet acknowledged in an interview today that it appears the region will contract in 2009 and signaled that further easing is ahead from the central bank. However, the MPC leader would also make the case the growth would return in 2010 which was the same outlook that the OECD put forth in its forecasts yesterday. The prospect of growth on the horizon may limit the scope of the ECB’s easing which may become a supportive factor following the expected rate cut in December. Indeed, German import prices falling 3.6% in October provided further evidence that inflation is no longer a concern for the central bank which has acknowledged that prices will drop below its 2% target by next year. Yet, rhetoric ECB member Nowotny that the central bank should remain cautious and keep the powder dry demonstrates that the MPC will remain measured in its approach.

John Rivera,

Currency Analyst