Sterling hit by Growth Concerns

U.K. economy slowing more than expected

The U.K. economy was far weaker in the first quarter of the year than had been previously believed. The full extent of the fall in the value of Sterling feeding through into inflation brought a slowdown in consumer spending.

Growth in Q1 was a mere 0.2% cut from 0.3% which had previously been reported. This contrasts from the 0.7% seen in Q1 ‘16.

Sterling had been looking to break and hold above 1.3000 prior to the data release but lost momentum falling to 1.2930.

The pound had been on an upward path for some time as analysts continued to be surprised at the resilience of the consumer. This may be coming to an end as economic activity slows. The final break above 1.3000 yesterday will be seen as exhaustive.

Higher inflation which is overshooting the Government’s target with the Bank of England seemingly unwilling or unable to bring it under control is a further concern for the consumer. The principal areas of slowdown in the latest GDP data are consumer-facing such as accommodation and household spending. According to the Office for National Statistics, this slowdown is caused by higher prices.

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Polls pointing to closer than expected election

The latest opinion poll puts the Conservative lead at just 5%.

Opinion polls, particularly in the U.K. don’t have the best reputation following the “Brexit surprise” last year. However, Sterling continued its fall overnight losing a further 3.5% to break support at 1.2920, reaching a low of 1.2867. Part of this fall can be attributed to a rebound for the dollar but there is no doubt that the pound is now firmly on the backfoot.

Against the Euro the pound lost further ground with the common currency making a new six-week high of 0.8700.

Pressure is building within the Eurozone for a tightening of monetary policy. The withdrawal or reduction of the Asset Purchase Programme is likely sooner rather than later as the economy begins to show resilience.

As the whole Eurozone project is to all intents an experiment. It may be that patchy and inconsistent growth is just a “fact of life” and a whole new economic paradigm will be forming. The one size fits all nature of the Eurozone economy will eventually even out as the higher inflation, high interest rate countries like Italy, Spain and Greece become used to a more stringent monetary regime.

Dollar finds a base

Momentum is a major driver of the FX market, either positive or negative. Since the issues that have been plaguing President Trump first surfaced, momentum had turned negative for the dollar. Other G7 currencies, particularly the Euro and Pound had been on a path to make new significant highs above 1.1200 and 1.3000.

Momentum is like the stretching of an elastic band and, eventually, it reaches as far as it can. This is beginning to happen for the dollar and the relative strength of the U.S. economy and the potential widening of the interest rate differential are being offered up as reasons for a turnaround.

The dollar index appears to have based around 96.80 and is now testing short term resistance at 97.40. President Trump is coming to the end of his first overseas visit. He blasted NATO Heads of State for their lack of defence spending shamelessly citing the Manchester atrocity as a consequence and will today move on to the G7 meeting.