British Contraction Slightly Better – Pound Unimpressed

The final release of British GDP was slightly better than the second one, but in line with the first – the economy squeezed by 0.5% in Q4 of 2010. GBP/USD doesn’t cheer up.

The bad weather that the UK experienced towards the end of 2010 contributed to fall, but it’s apparent that the economy would be at least frozen, with GDP unchanged, even in normal conditions. Britain, that was late to return to growth after the global financial crisis, is finding it hard to recover.

GBP/USD managed to get back above 1.60 before the release, but is now dropping towards this line. A break below this line will open the road to support is found at 1.5940, a line that was challenged by cable yesterday, as talks about defaulting Irish banks meant that British banks would suffer as well, being extremely exposed to them.

1.6110 is resistance above, followed by 1.6280-1.63, which was only temporarily broken last week.  For more technical levels and further events in this busy week, see the GBP/USD forecast.

The pound finds it hard to break out of range against the dollar, and is also losing ground to the yen and the euro recently.

More data

It’s been a busy morning regarding British releases: Britain’s current account showed a deficit of 10.5 billion, as expected.  Net Lending to Individuals does provide hope, as it grew by 2 billion, far better than a 1.2 billion rise that was expected. More lending means more economic activity.

The pound bulls do have to worry about a relatively less important figure, but a number that could impact the interest rate:  M4 Money Supply, that was expected to rise by 0.7%, unexpectedly squeezed. Less money in circulation means less inflationary pressures. This could impact the timing of the rate hike in Britain, and could weaken the British pound on lower expectations.