Sterling dipped dramatically overnight against both the Euro and the US Dollar. GBP/EUR is trading at a yearly low of 1.1532 and GBP/USD is up slightly off the low at 1.58. This move follows yesterday’s largely unexpected decline in Gross Domestic Product in the UK. The headline figure released by the office for national statistics showed that the economy contracted 0.5% in the final quarter of 2009, markets had been anticipating growth of 0.4.

Markets do not seem to have accepted the explanation that the appalling GDP figure is simply down to the poor weather in the tail end of last year and are now concerned that with severe austerity ahead, we could fall back into recession when the figures for Q1 are announced later this year.

Market focus now shifts to the MPC minutes announced today. Traders will be looking at the rhetoric and tone of comments made and will be seeking insight into what will happen with interest rates and QE. Quantitative easing has been used successfully in the US and could potentially be re-introduced in the UK to kick start the economy back into action. Any dovish comments however and the pound could reel further.

The BoE has a very difficult balancing act ahead with the UK now entering a period of stagflation; low economic growth, low interest rates, high inflation and high unemployment. The Bank of England would typically raise interest rates to combat inflationary pressure yet the likelihood is that in light of the GDP figures yesterday, that rates will remain on hold in order to not dampen the UK economic recovery even further.

The ECB is also warning about rising inflation pressures and the Euro has subsequently found support with hawkish comments from Jean Claude Trichet last month. The Euro has also benefited from the European Financial Stability Facility’s performed strongly at its five year bond auctions to raise €5 billion for Ireland. Strong demand was seen from Asia which represents confidence returning to markets on the stability of the European Union.

The Dollar has fallen back against most of the majors ahead of this evenings policy announcement from the Fed, the market expectation is that there will be a dovish tone.

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Best Regards
Luke Zorab
Torfx Currency Dealer

“Any opinions expressed in this document are those of TorFX analysts. Any analysis and/or forecasts provided are aimed at helping clients understand market conditions and developing trends. Clients are wholly responsible for their own trading decisions.”