Jan25
UK GDP shows a contraction causing sterling exchange rates to fall even further
By Alex Ellis
GBP exchange rate forecast 2011
UK GDP showed a contraction this morning as the sterling rally looks set to be well and truly over. The UK is now beginning to look like it is entering into a stage of stagflation; this is where both inflation and unemployment remain persistently high. Inflation is currently at 3.7% and therefore is way above the Bank of England’s target of 2% and looks set to rise even further in the coming months.
This is the problem facing the Bank of England, if they raise interest rates then they risk damaging the economic growth however if they don’t then inflation could quite easily spiral out of control. The MPC are still split on what policy to undertake: Andrew Sentance has been in favour of hiking the interest rates for some time now whereas Andrew Posen has been of the opinion that the best way to stimulate the economy is to continue the QE programme.
I personally think that this predicament will continue for the majority of the year and we will not see and interest rate hike until most likely the latter part of the year as this is when the economy will be much more balanced.
Other releases this week that could affect the exchange rates are Wednesday’s Bank of England minutes from their most recent meeting, in the past this has caused movement if any of the members vote for an interest rate hike or if there is any indication of an extension to the BoE QE programme.
Current Euro Exchange Rates
The Euro has now benefited from the weak UK retail sales data and the huge contraction in the UK GDP figure shown earlier this morning. All it will take is for the UK to have one more negative quarter of GDP and technically we are back in a double dipped recession. Consumer confidence is released at 10:00 (GMT) for the Euro zone and I would expect this figure to be extremely important as the debt crisis in the euro zone seems to have gone quiet and if there is confidence in an economy then investors will move into the currency causing Euro strength.
US Dollar Exchange Rate forecast
In US news there is an interest rate decision due at 19:15 (GMT) although it is somewhat unlikely that the FED will raise interest rates so soon, we are able to offer contract options which will protect your position outside of UK trading hours.
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