London Session: The UK on the brink of the triple dip

  • Rate this Story
  • 0
  • 0

By Kathleen Brooks | January 26, 2013 1:33 AM EST

Don't forget that you can now follow Forex.com's research team on Twitter: http://twitter.com/FOREXcom

The 0.3% contraction in UK GDP last quarter was worse than the 0.1% contraction expected and suggests that the UK's "recovery" plan is well off track and we are rapidly losing pace to big economies like Germany and the US. The Q4 data meant that the UK economy didn't register any growth in 2012. The Office for National Statistics said that some of the decline was down to special events in Q2 and Q3 like the Olympics and Jubilee bank holiday, which provided a lower base for growth in the third quarter. The ONS said that sales of Olympic and Paralympic tickets added 0.2% of GDP in Q3, and reduced Q4 growth by a similar amount.

Production: the weak link for the UK economy

 

The chief reason for the decline in the economy was production, which contracted 1.8% over the last three months of the year and contributed to the whole of the 0.3% decline in GDP in Q4. The service sector registered flat growth and construction rose 0.3%. Production was weighed down by a sharp decline in mining and quarrying, which fell by 10.2% in Q4. This industry alone contributed to a 0.2% fall in GDP. Production is the weakest link for the UK economy, the ONS reported that this sector has declined in each quarter of 2011 and 2012, and is now 5.1% lower than in Q4 2010. Manufacturing, the largest sector in the productive industries, accounts for 10.5% of GDP, has also seen a fall of 2.4% over the last two years. Thus, for the UK to stage a meaningful economic rebound we either need to see a pickup in mining activity (hardly likely) or a significant increase in other sectors of the economy like services, which have been managing to stay in expansion territory in recent years, but are hardly registering stellar growth.

Today's GDP data also highlights the mysterious buoyancy of the UK labour market, the latest employment data shows an economy that is contracting but still managing to create jobs. Looking at the detail of the GDP report, the service sector must be creating enough jobs that mute the impact of a shrinking production sector.

A weak pound: the silver lining

 

The silver lining for the UK's production industries could be the weak pound, which nose-dived after the GDP release, which may benefit UK exports in the coming months. The pound has become more sensitive to domestic economic factors in the UK and the GDP miss caused GBPUSD to drop below 1.58. It found good support at 1.5750, but a weekly close below this level would be a bearish development for this cross. The pound is being hit from two directions: 1, a weak economic picture in the UK and 2, unwinding of the safe haven trade as the Eurozone crisis stabilises. The second point could add to the downward pressure on the pound in the coming months. Later on Friday morning the ECB will release details of the amounts of LTRO loans that banks' are planning to re-pay next week. If banks are happy to pay back emergency funding it suggests that the banks are healthier and the sovereign crisis has turned a corner. This means that holding the pound as a "safe haven" is no longer necessary, so we may see a structural shift out of the pound in the coming months. GBPUSD may see back to 1.5360 - the lows from June 2012 - if the UK's economic picture remains bleak into 2013 and the Eurozone remains stable. But EURGBP could benefit from GBP weakness. It is already at its highest level for 14 months. Above 0.8550 would clear the way for a re-test of 0.88 - the highs from late 2011. After that 0.9000 comes into view, although this is a powerful resistance level and was a double top from June 2011.

Hurdles ahead for GBP

 

The next couple of weeks will be important for GBP. The PMI data for January will be scrutinised even more than usual to see if weakness continued into the third quarter, investors will also try to detect signs that snow may have caused economic disruption that could weigh on Q1 GDP. Added to that be on the lookout for comments from the rating agencies. The UK is on negative watch by all three main rating agencies and a triple-dip recession could be enough for them to strip the UK of our special triple A status. Although rating downgrades didn't impact the US or France in any meaningful way, we believe it may have a big impact on sterling because 1, GBP has become extremely sensitive to the domestic economic outlook, also 2, the UK government has pledged its credibility on maintaining the triple A rating and losing it could threaten the government's commitment to fiscal consolidation if it has lost the triple A rating anyway.

Germany highlights UK's weakness

 

Elsewhere, the German IFO industrial survey highlighted how dismal things are in the UK, it rose in January rounding off a good week of economic data for the largest economy in the Eurozone. This has helped EURUSD to maintain gains above 1.34. A weekly close around 1.3460 - the daily pivot point - would be a very bullish development for this cross.

Ahead today, watch out for details of the LTRO repayments from the ECB, Canadian CPI and New Homes sales.

One to watch: EURGBP: If the LTRO re-payment by Eurozone banks is more than the EUR100bn expected then we could see this cross surge above 0.8550 as GBP's status as a safe haven is eroded potentially causing a further unwinding of GBP longs. See above for more details.

EURGBP: weekly chart

 

Source: Forex.com

Best Regards,

Kathleen Brooks| Research Director UK EMEA | FOREX.com

d: +44.(0).20.7429.7924 | f: +44.(0).20.7929.2010 | M: +44 (0) 7919.411.957 | e: kbrooks@forex.com| w: www.forex.com/uk

23 College Hill | 3rd Floor | London EC4R 2RT

Now you can follow us on Twitter: http://twitter.com/FOREXcom

Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that FOREX.com is not rendering investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. FOREX.com is regulated by the Commodity Futures Trading Commission (CFTC) in the US, by the Financial Services Authority (FSA) in the UK, the Australian Securities and Investment Commission (ASIC) in Australia, and the Financial Services Agency (FSA) in Japan. Please read Characteristics and Risks of Standardized Options (http://www.optionsclearing.com/about/publications/character-risks.jsp).

  • Rate this Story
  • 0
  • 0
For more forex information, go to www.forex.com

Join the Conversation

IBTimes TV
E-Newsletters

We value your privacy. Your email address will not be shared.