Currency Update – Friday 26th February

Things have gone from bad to worse for the Pound recently, as weak GDP figures, problems with sovereign debt, and the prospect of more QE have weighed on the already weak currency. Yesterday things went even more downhill as the business investment figures from Q4 2009 fell by a dramatic 5.8%, which makes the likelihood of a upward revision today to the previous almost flat GDP figures less likely. The last release of retail figures,although extremely weak for January’s reading, did provide some upward revisions to previous month’s which did originally bode well for today’s revision to GDP, but the picture now looks much more worrying. The worries over today’s GDP figures have taken the Pound down below 1.5250 against the Dollar, not helped by a reduction in risk appetite caused by weak US jobless data.

The Pound even managed to slip back against the Euro yesterday, even as both Moody’s and S&P saying that Greece may have to be taken down ‘a couple of notches’ if they don’t stick strictly to their fiscal reduction plan. Sticking to the plan may be hard, with a series of strikes and street protests already happening, the volatile nature of Greek politics has reared it’s head with a bizarre attack on Germany by Greece’s deputy Prime Minister. Disregarding the good advice to not bite the hand that feeds you, the deputy PM said that Germany was ill-placed to make remarks about Greece’s actions after their own behaviour during the Nazi occupation of Greece. By raising events that happened over 60 years ago, and which the very existence of the European Union was invented to stop ever happening again, Greece have further isolated themselves from the rest of their neighbours and make it less likely that Germany will lead a bailout package. The Euro has stayed weak generally, as yet more concerns were raised over Spain’s debt, but the weaker Pound still managed to slip further against the single currency, hitting a 1 month low below 1.1250.

The UK GDP revision data has just been released and they have come in surprisingly strong with a 0.3% growth rate in Q4, much better than expected, with most of the growth coming from the service sector which grew at 0.5% in the last quarter. This brings the figures in line with what was previously forecast before the disappointing first estimate came out, and it can’t hide the fact that the annual comparison is still -5.3%, with revisions to previous quarters showing the economy actually shrank more than first thought. Markets tend to be forward rather than backward looking, and although today’s figures are welcome, the data that has been released recently for the current quarter has still been weak. The Pound has gained very little from the GDP revisions, and still remains on the back foot. The UK GDP figures are likely to be thrown into the shade later today when US figures are released, which are expected to show strong growth, and the other release of note today, Eurozone CPI, is expected to show inflation staying steady at benign levels.