Last week was a negative one for GBP/USD as the dollar
started to retrace some of the losses it made against sterling over recent
weeks. Cable has been a volatile cross over recent weeks due to both troubles
in the UK
and the ever mentioned fiscal cliff.
As the
graph above shows we opened around the 1.6150 mark and have steadily declined
throughout the week. With well
documented troubles regarding the fiscal cliff in the US many clients
are asking why the dollar is strengthening day on day against the pound. The
answer is fairly simple, the US
are making all the right noises at a time where the UK are making all the wrong noises
and showing signs of entering into a triple dip recession.
The
Christmas period was better than expected for the US economy with better than
expected retail sales in November and December which was only revealed in
Wednesdays FED Beige Book. It means the economy in the US has started
to grow and show positive signs to grow further.
The Beige
Book also revealed that the manufacturing sector was still under performing and
the effects of the fiscal cliff were still having a knock on affect to the
markets. This news caused the pound to start making small gains against the
greenback. That was until jobless claims were shown to have reduced by over
30,000 killing off any rejuvenated hope from the UK.
So why is the pound so weak?
The UK is still
under threat of losing its prestigious triple A credit rating by both Moody’s
and S&P ratings agencies. A downgrade would reduce investors risk appetite
and increase the likelihood of investors looking for a safe haven currency like
the greenback. The main cause for sterling weakness however is the imminent
threat of the UKentering into a triple dip recession.
A recession
is caused by two consecutive quarters of negative growth. The fear for the UK markets is
that recent data releases such as our recent GDP estimate of -0.3% indicate
that the last quarter of 2012 was worse than expected and the first quarter of
2013 could follow suit. Later this week the official GDP figures are released and if they match the estimates it is highly likely we could see sterling lose even more ground against the dollar.
Either
way you look at the market it is a difficult time to gauge any future
movements, reinforcing the importance of staying in close contact and utilising the tools that are available. Click here to complete the contact form for a free, no obligation consultation.
