The pound fell heavily across the majority of the sixteen most actively traded currencies yesterday as market speculation intensifies as to what if any action the Bank of England (BoE) may take tomorrow at its monthly rate setting meeting. Against a backdrop of an ingrained double-dip recession as evidenced by last week’s shocking GDP figures that showed that the UK economy contracted by 0.7% in the three months to June 2012, the BoE’s monetary policy committee (MPC) will need to decide on whether to cut interest rates in the UK from their already historic low rate of 0.5% which has been in place since March 2009 and/or further boost their bond buying Quantitative Easing (QE) program which was only increased by £50 billion to £325 billion at the July meeting.
The pound was further hit after credit ratings agency Moody’s cut its economic growth forecasts for the UK and warned it was becoming harder for the UK government to stick to its austerity timetable. Moody’s lowered its output growth forecast to 0.4% for this year and 1.8% for 2013. Even so, the forecasts remain more optimistic than the International Monetary Fund’s prediction that the UK economy will grow just 0.2% this year and 1.4% next year. Moody’s kept the UK’s AAA rating with a “negative outlook” unchanged.
Meanwhile, the Organization for Economic Cooperation and Development (OECD) become the first international body to forecast an outright contraction for the UK economy in 2012.
Christophe Andre, Acting Head of the Organisation for Economic Cooperation and Development’s (OECD) UK desk stated yesterday that “Most of it is really about the external environment – the Euro zone crisis is going to weigh on the UK in the coming months. Under these circumstances you cannot expect much more than very slow growth (…) GDP will probably fall in 2012”.
The euro recovered against both the pound and the US dollar, climbing off 4 year lows against the former and 2 year lows against the latter as the markets continue to anticipate some announcement at tomorrow’s European Central Bank (ECB) meeting following last week’s comments from its President, Mario Draghi that he would do ‘whatever it takes to safeguard the euro’ which is ‘irreversible’.
Yesterday, the Italian Treasury managed to sell €5.48 billion in 5 and 10 year debt, just shy of its €5.5 billion target with the 10 year paper attracting a bid-to-cover ratio of 1.29 for the €2.5 billion auction versus the 1.28 seen the last time around. Yields continue to fall following last week’s comments from Draghi, Merkel and others from 6.19% to 5.96%.
To underline the grave problems in the euro zone, Spanish unemployment continues to hit record levels, moving up from 24.4% in May to 24.63%. The Spanish economy shed 53,500 jobs during the period to bring the total number of unemployed to 5,693,100. In the last year, the number of people without a job has increased by 859,400.