The Effects of FX

The pounds finished the month a crippled trapeze artist. While flying high at just under 1.60 against the dollar at the start of February and bouncing between 1.13 and 1.15 against the euro throughout February, the pound failed to give a good performance hovering around 1.5250 and 1.12 respectively. Against most other currencies the pound is second rate. It is easy to relate this routing to the remaining fundamental fears:

• The UK economy’s revised fourth-quarter GDP view to 0.3% growth from 0.1% shows weakness and other surveys point to a double dip recession.
• In fear of a fragile recovery the BoE may drip fed some more QE.
• The bulging public deficit likely to exceed Alastair Darlings 2010 budget of £178bn.
• A recent poll suggests the Conservative’s lead by only 6%

Close polls increase likelihood of an election being called early and in case of a hung-parliament the immediate risk is for risk agencies to decide that political conditions are not conducive to swift action on the UK’s debt problems and a downgrade will loom.

News on Friday centre from The Commerce Department. They said Friday that GDP rose at a 5.9% annual rate from October through December, the fastest rate since the third quarter of 2003. The number is two tenths better than forecast. A good reason to back the USD.

However, the US data did show consumers were more modest in their spending last quarter than first thought. Real consumer spending rose at an 1.7% annual rate, compared with the previously estimated 2.0% gain.

The week ahead will prove as tough as the last for the pound.

Brought to you by foreign exchange specialists Moneycorp