The pound was one of the losers during January, and there are quite a few reasons to believe this will continue during February.
The British economy contracted 0.3% in Q4 according to the first release of GDP. The economy actually enjoyed only one quarter of growth, Q3, and this is clearly linked to the Olympics.
* This article is part of the February 2013 monthly forex report. You can download the full report by joining the newsletter in the form below.
Another thing that hurt the pound was the option that the UK could leave the EU. This seems a remote option for the far future, but the ongoing debate about this in the UK already has implications on the British pound. Cameron’s EU speech weighed on the currency as a “Brixit“ poses risks to the economy – the UK still depends on trade with the continent. Worsening relations aren’t good.
The EU has another impact on the pound: when things worsened in the euro-zone debt crisis, money fled from the continent to the UK. Now, the optimism from Draghi sends money to the EZ, and out of London.
We’ve already seen in the past that a weaker pound did little to help British exports and the economy. However, the impact on inflation, imported one, could be damaging.
The Bank of England is stuck between a rock and a hard place: launching more monetary easing in the form of a rate cut or QE could contribute some monetary stimulus, especially as yields are rising. However, as inflation refuses to drop, this could have unintended consequences.
The expected arrival of Mark Carney as governor of the BOE was greeted with cheers in the UK, as he is seen as a hawk. Yet recent comments from Carney show that he is acknowledging the weakness of the UK, and could oversee a dovish BOE.
Also the British government has a dilemma: the austerity measures don’t really work and there is pressure to abandon the plan and move to Plan B: fiscal stimulus, in order to revive the economy. But on the other hand, this could cost the UK its perfect AAA credit rating. T
On this background of tough policy options, the pound could come under more pressure.
During February, statements from BOE officials will be important to note: the inflation report, meeting minutes and speeches will all matter more than the actual rate decision.
Not all is bad in the UK: jobless claims surprised with a drop, and manufacturing could be growing again, according to fresh purchasing managers’ indices.
On the other hand, Britain’s biggest sector, services, is contracting after a long time of growth. This is quite worrying. Also the housing sector isn’t doing too good and retail sales disappointed with a drop.