Today saw a slight recovery for sterling against the dollar following the revised GDP figures released this morning. Official figures showed that the UK economy grew more that originally thought as The Office for National Statistics (ONS) changed its growth forecast for 2012 from no growth to 0.2%. There was no sudden spike but the exchange rates gradually climbed over the course of the day to reach a high of $1.5217.
However, the figure for the quarter of 2012 remained with the UK economy showing a contraction of -0.3%, leaving the door open for the UK to head into a triple dip recession when the initial GDP figures for quarter one are released in April.
So what is GDP?
GDP stands for Gross Domestic Product and is probably the most important of all economic statistics and can have a huge impact on exchange rates.GDP figures attempt to capture how the UK economy is performing in one number, if the figures are positive for the previous three months, the economy is growing. if it is negative it is contracting. If the UK economy has two consecutive three-month periods of contraction it means we are in recession.
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What effect would recession have on exchange rates?
Unfortunately not a great one as we could see sterling lose even more ground against the dollar. It may lead The Bank of England to at look at more Quantitative Easing to to help stimulate growth which in turn will devalue the pound meaning dollars would become more expensive to buy. It will also put pay to the BoE talking up sterling in the near future as they will do all they can to keep exchange rates low to help boost exports from the UK, especially if troubles from the euro-zone start to resurface. Although this is bad news for anyone buying dollars the dramatic decline we have seen is great news for anyone looking convert dollars back into sterling.
Where do I see rates going?
As I have mentioned in previous posts we have seen a 7% drop in exchange rates so far this year and at present cannot see exchange rates recovering (at least not in the short term). Some of the forecasts I have access to are showing that GBP/USD rates could recover back towards $1.56 in the next 3 months but with uncertainty in the euro-zone still bubbling away potential for safe-haven flows into the dollar could also cause exchange rates to fall so in my opinion I think it is unlikely to see that kind of gain.
What should you do
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