Uk Economy & Currency Update

We’ve seen a relatively poor weak for the pound this week compared to recent weeks. Sir Mervyn King at the Bank Of England stated the British economy is likely to ‘zig-zag’ over the course of the year, and this can be seen in this week’s downturn compared to the rest of the year.

This morning, it was announced that the UK economy shrunk by 0.2% in the final quarter of 2011, providing a sharp contrast to the economic growth caused by the GDP expanding 0.6% in the same time frame. This struck a blow to last Friday’s announcement that retail sales were higher than expected. Concerns over the shrinking economy caused the Office Of National Statistics to downgrade the total GDP output for 2011 from 0.9% to 0.8%. This, combined with the recent problems with RBS and Barclays, paints a grim image of the state of the UK economy. However, the Bank Of England voted against any further quantitive easing for the time being, despite two members of the bank’s monetary policy committee voting in favour of it. The fact that certain members of the bank are considering further QE fuelled a certain degree of paranoia for the UK economy, causing the value of sterling to drop slightly. Despite these concerns, however, the Bank Of England remains firm in their belief that the UK won’t enter recession this year.

This downturn has caused the Euro to gain a measure of strength against sterling, with rates for transferring euros to pounds being at their best in two and a half months. The Eurozone itself has seen a mixed outlook this week. The ongoing situation in Greece still continues to weigh the currency down, although a series of meetings this week improved the chances for a solution to the issue, albeit a temporary one, with Greece expecting to see a 4.4% decline in output by the end of the year. The European Commission was also forced to downgrade the 0.5% eurozone economy growth to a 0.3% contraction. In total, the EU Commission expects the economies of Greece, Portugal, Belgium, Spain, Italy, Cyprus, The Netherlands and Slovenia to suffer contractions this year. Due to this ongoing weakness, the rates for transferring sterling into euros remain strong, just not as strong as we’ve seen for the past two months.

Sterling has, however, seen small amounts of strength against the US dollar this week, with the sudden Euro resurgence causing weakness in the US currency.  This caused sterling to see a 0.2% resurgence against the dollar on Monday, which gave us the best rates for transferring sterling to dollars we’ve seen for several weeks. This strength continued to Friday based on steady demand from corporate.  However, we are still seeing some resistance, preventing any major changes in the dollar/sterling rate.

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