Euro and pound suffer on weak growth data

02-25-2009 16:02

After the second reading of the last quarter of 2008 the pound dropped by more than 100 bps. The gross domestic product (GDP) proved that the country suffered its poorest three month period of growth since 1980. The pound showed a 1.4600 level before erasing its gains due to the period of risk appetite that recently started in the US markets. The UK gross domestic product figures continue to be stable at -1.5% against expectations of a revision lower to -1.6% while weaker private spending statistics resulted in gloomy domestic growth prospects. 70% of the gross domestic product consists of the service sector which dropped from -0.5% to -0.9%.

BoE continues its easing policy

Hopes that the UK domestic growth could return in the near future will be crushed by the weaker consumption and service sector data. Retail sales data improved but the recovery is more likely to be a product of deep discounting then an organic demand. For that reason it is expected that at the March 5th meeting the Bank of England will lower their benchmark rate by 50 bps. This could be followed by quantitative easing in order to stimulate growth. According to an EU report it is possible that the pound’s weakness versus the euro could undermine the UK economy which is denied by Gordon Brown who believes that it would stimulate exports.

Fall in exports stresses expectations

Before German gross domestic product data proved the country’s largest reduction of the last 22 years, the euro showed a 1.2900 level. Concerns of future growth increased as exports dropped from -0.2% to -7.3%, although the reading confirmed the expectations. It is likely that the weakening global demand will affect the economy further while the demand for German products is very important for the German economy.

US existing home sales improve

Although yesterday’s short period of risk appetite, which frustrated the dollar, traders continue to be cautious and this is positive for the Greenback. Chairman Ben Bernanke used yesterday’s testimony to Congress to ease bank nationalization concerns. However, weak fundamental data from Asia and Europe prove the global deterioration. It is likely that the existing home sales report will result in a minor increase while buyers are stimulated by the home prices fall by 18.55%. The tight credit markets remains a problem while President Obama promised in his address to Congress to increase lending, which could improve prospects for reaching the bottom of the housing crisis soon. The dollar continues its strong association with equity markets and any major raise should affect the dollar negatively.