The British pound is back under a cloud of uncertainty as analysts worry that although Britain may technically emerge from recession in the third quarter, underlying momentum in the economy remains very weak.
Sterling is now languishing near one-month lows against the US dollar and three-week troughs versus the euro as traders fear that additional Bank of England monetary easing is on the horizon again. The International Monetary Fund warned British policymakers that they must now be ready to deploy a back-up plan, such as cutting fiscal targets, should the UK economy continue to falter. Surprisingly encouraging comments about Greece following a meeting between euro zone finance chiefs gave the euro and other risk-heavy currencies some support. Still, the mood across financial markets remains far from assured after officials in Europe unexpectedly said that Spain was not working on a bailout request.
Sterling
The pound’s bearish patch has clearly widened and the British currency may find it hard to attract buyers despite UK economic data producing stronger than expected results. BRC retail sales grew at an annual rate of 1.5 per cent in September versus the previous month’s print of -0.4 per cent. At the same time, RICS published a healthy looking survey on house prices that beat market forecasts. Nevertheless, a number of economists have grown concerned by a lack of depth in recent evidence suggesting that the UK economy will firmly emerge from recession in the third quarter.
US dollar
The International Monetary Fund has broadened the US dollar’s safe haven base heading after it downgraded its global growth forecasts for this year and next. The IMF also warned that unless European policymakers’ make real progress on stemming the debt crisis, the subsequent troubles that it foresees in the world economy could turn out to be even more complicated than the recent financial crisis.
Euro
The euro has reversed a percentage of Monday’s decline against the US dollar and has broken fresh three-week highs versus its UK counterpart, after euro area Finance Ministers suggested that Greece’s austerity attempts are on track. Officials praised efforts by Athens to meet its bailout conditions as German Chancellor, Angela Merkel heads to Greece in what appears to be strong support for Greece’s future inside the euro.