Pound Rattled by Downward Revision to GDP

The British pound has taken another knock lower in response to the downward gross domestic product (GDP) revision, report Caxton FX, as the market pares back expectations that the Bank of England (BoE) will raise interest rates in the near term.

The initial estimate of 4Q10 GDP was revised down by 0.1%, leaving economic growth in the final three months of 2010 standing at -0.6% and heightening concerns about the UK’s already unstable recovery.

Duncan Higgins, senior analyst for Caxton FX, said: “The data provides further evidence for the dovish MPC [Monetary Policy Committee] members who already consider the economic recovery too fragile to support a higher interest rate. To an extent the adverse weather conditions can explain away much of the decline in growth. So far in 2011 we have seen a reasonable uptick in most economic indicators suggesting that growth has rebounded in the opening part of the year.”

Having already been on the back foot for the past couple of sessions, sterling has lost yet further ground in response to the data.

Higgins continued: “Interest rate speculation has underlined sterling strength recently, but with this priced in there is room for a slight correction – and that’s what we’re seeing. There are mounting concerns about the negative implications of a rate rise on the UK economy. The uncertainty plaguing the economic outlook, which stems from the government’s austerity measures and rising levels of inflation, is keeping the pound pegged back.”

Sterling has dropped back to €1.1650 following the data and at this level it would leave the rate 1.8% lower on the week. Against the US dollar, the pound is also struggling, heading back beneath US$1.61.


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