Pound weakness and UK growth contraction
[vc_row][vc_column][vc_column_text]The pound came under fresh pressure ahead of the weekend as November’s UK GDP data showed a sharp monthly contraction.
Meanwhile, a better-than-expected ZEW economic sentiment survey helped to shore up the euro against its rivals.
The US dollar pushed higher in the midst of optimism over the incoming Biden administration as market risk appetite generally diminished.
This risk-off mood left the Australian and New Zealand dollars on the back foot, even as the latest Chinese growth data offered fresh signs of an economic recovery.
Pound pressured after sharp contraction in UK GDP
A -2.6% monthly GDP contraction weighed heavily on the pound as worries over the UK’s economic outlook picked up again.
Although forecasts had pointed towards an even sharper monthly contraction, GBP exchange rates failed to receive any particular relief.
The risk of the UK experiencing a double-dip recession left the pound biased to the downside as the odds of a negative fourth quarter growth rate rose.
As the ongoing tightening of Covid-19 social restrictions continues to hamper economic momentum, investors saw fresh reason to bet on a weak first quarter performance.
The mood towards the pound could sour further on Friday with the release of January’s manufacturing and services PMIs.
Another month of contraction for the service sector may push GBP exchange rates sharply lower across the board, given the significant role the sector still plays in the UK economy.
Unless the services PMI can avoid falling deeper into contraction territory at the start of 2021, the pound looks set to remain on the back foot against its rivals.
Resilient German economic sentiment supports euro demand
The euro found some support today as January’s German ZEW economic sentiment index picked up further than anticipated on the month.
As the index strengthened from 55.0 to 61.8, this suggests that confidence among German businesses took a turn for the positive this month, easing fears over the economic outlook.
Stronger business confidence within the Eurozone’s powerhouse economy gave investors reason to bet that the first quarter could see greater resilience, reducing the risk of a fresh growth contraction.
Comments from the Bundesbank’s monthly report also offered EUR exchange rates support as policymakers indicated that inflation is likely to turn positive in January.
Even so, fresh volatility could be in store for the euro on Thursday in the wake of the European Central Bank’s (ECB) January policy decision.
Although no change in monetary policy looks likely at this stage, the single currency could still come under pressure if policymakers show any fresh signs of dovishness.
On the other hand, if the central bank expresses any confidence in the Eurozone’s economic outlook, the euro may gain fresh ground.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]
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* Information courtesy of Currencies Direct, Philip McHugh
Joining the corporate trading desk in 2007, Phil now over sees all of Currencies Direct’s corporate dealing activity. Having gained experience working with hundreds of businesses to optimise international payments processes and execute comprehensive risk management strategies, Phil currently works with a portfolio of corporate clients whilst managing Currencies Direct’s overall market exposure
Phil has FCA approval and has completed the Certificate in International Treasury Management (CertiTM)
The contents of this report are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. Currencies Direct cannot be held responsible for any loss or damages arising from any action taken following consideration of this information. This article was written by Currencies Direct
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