Sterling continues to fall as the data confirms the UK is in recession

Sterling continued to fall against the dollar on Thursday as the revised Gross Domestic Product (GDP) data released by the office of National Statistics (ONS) confirmed that the UK is back in recession. The pound/dollar cross hit a low of $1.5639 on the back of the news and coupled with concerns over Greece’s future in the Euro continued to push investors towards the safe haven U.S dollar.

Last months estimate showed the UK economy had shrunk by 0.2% but revised figures released this morning indicated the contraction was more than forecast at 0.3%. It is the second consecutive quarter that the UK economy has contracted; in the last three months of 2011 the economy shrank by the same margin. It is the first time in a year and half we have seen the economy shrink for two consecutive quarters.

On the back of the poor Retail Sales data released on Wednesday, today’s confirmation that the UK is back in recession will have added to the speculation the Bank of England (BoE) will enter into another round of monetary stimulus. If the BoE go down the Quantitative Easing (QE) route it will reduce the value of the pound and we could see the GBP/USD cross drop even further.

Over the course of the day we did see a small recovery as rates pushed back towards $1.57 on the back of poor data in the U.S. Manufacturing slowed in May mainly due to weakening exports, the purchasing managers index (PMI) fell to 53.9 compared to 56.0 in April and although a reading over 50 indicates growth it will be seen as a backwards step for the economy.

Over the next few weeks it will be a testing time for cable as troubles in the Euro-zone and the UK struggling to grow could lead to rates falling even further back. If you are thinking of buying or selling dollars in the coming months click here to send me a direct email or complete the contact form on the homepage of the blog.