GBP held back again…
Friday’s downward revision of Q4 GDP from a 0.5% to a 0.6% contraction adds yet another headache for the Bank of England’s MPC – as it walks the fine line between controlling inflation and supporting growth. These figures may make policymakers think twice about raising interest rates in the near term, with the recent release of the BOE’s minutes stating some members were waiting to see how Q1 GDP went before considering a rate hike.
It is not all doom and gloom out there however with recent signs showing that economic activity picked up at the start of this year, following December’s snow-related disruption. Figures from January for the manufacturing, construction and services sectors were all relatively positive and this week’s release of the latest purchasing managers’ indexes are all forecast to be above 50 – with anything above this level indicating growth.
This positive news can be again, unfortunately, be countered by some further ominous signs though – apologies for adding to your Monday morning woes! A recent data release showed that households were tightening their belts even before the rise in VAT, with household spending falling 0.1pc – the first fall in 18 months. This combined with near all time lows in consumer confidence do not exactly bode well for the all important service sector, which makes up three quarters of the UK economy. In addition, with North Africa and Middle East political woes continuing, the huge surge in oil prices this has caused will only add to the UK’s spiralling inflation rate. A fact I read yesterday stated that in the five US recessions since the 1970’s all were preceded by huge increases in oil prices – so there are serious headwinds out there for both the UK and world economy.
Okay, that is all the bad news out of the way for now. In the UK there are no data releases until tomorrow with the manufacturing PMI the one to watch then. In today’s releases, the EU inflation figures are released at 10 GMT with market consensus forecasting the rate remaining steady at 2.4%. If the rate is higher than this it would add more pressure for the ECB to increase rates – with many of the ECB rate setters already making hawkish comments. In early morning trading GBP/EUR was trading at 1.1710 and GBP/USD at 1.6190 – with the latter range trading between for 1.60 and 1.62 for the last couple of weeks. Here is to a positive and upbeat week!