Uk Economy & Currency Update

We’ve seen a relatively poor weak for the pound
this week compared to recent weeks. Sir Mervyn King at the Bank Of
England stated the British economy is likely to ‘zig-zag’ over the
course of the year, and this can be seen in this week’s downturn
compared to the rest of the year.

This morning, it was announced that
the UK economy shrunk by 0.2% in the final quarter of 2011, providing a
sharp contrast to the economic growth caused by the GDP expanding 0.6%
in the same time frame. This struck a blow to last Friday’s announcement
that retail sales were higher than expected. Concerns over the
shrinking economy caused the Office Of National Statistics to downgrade
the total GDP output for 2011 from 0.9% to 0.8%. This, combined with the
recent problems with RBS and Barclays, paints a grim image of the state
of the UK economy. However, the Bank Of England voted against any
further quantitive easing for the time being, despite two members of the
bank’s monetary policy committee voting in favour of it. The fact that
certain members of the bank are considering further QE fuelled a certain
degree of paranoia for the UK economy, causing the value of sterling to
drop slightly. Despite these concerns, however, the Bank Of England
remains firm in their belief that the UK won’t enter recession this
year.

This downturn has caused the Euro to gain a measure of strength against sterling, with rates for transferring euros to pounds
being at their best in two and a half months. The Eurozone itself has
seen a mixed outlook this week. The ongoing situation in Greece still
continues to weigh the currency down, although a series of meetings this
week improved the chances for a solution to the issue, albeit a
temporary one, with Greece expecting to see a 4.4% decline in output by
the end of the year. The European Commission was also forced to
downgrade the 0.5% eurozone economy growth to a 0.3% contraction. In
total, the EU Commission expects the economies of Greece, Portugal,
Belgium, Spain, Italy, Cyprus, The Netherlands and Slovenia to suffer
contractions this year. Due to this ongoing weakness, the rates for
transferring sterling into euros remain strong, just not as strong as
we’ve seen for the past two months.

Sterling
has, however, seen small amounts of strength against the US dollar this
week, with the sudden Euro resurgence causing weakness in the US
currency.  This caused sterling to see a 0.2% resurgence against the
dollar on Monday, which gave us the best rates for transferring sterling to dollars
we’ve seen for several weeks. This strength continued to Friday based
on steady demand from corporate.  However, we are still seeing some
resistance, preventing any major changes in the dollar/sterling rate.

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