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Pound Hits New Lows as UK Officially Enters Recession

Last updated 1/23/2009 5:09 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Nikkei plunges 4% as Sony, Samsung show losses
• Dollar, yen bid accross the board as risk aversion reigns
• All eyes on GE earnings ahead of US market open
• Oil at $42/bbl
• Gold holds the $850/oz at $854/oz last

Overnight Eco

• JPY All Industries Activity -2.3% vs. -2.2%
• AUD Import Prices 10.8% against 5.8% eyed as weaker currency impacts
• EUR French Flash Manufacturing PMI improves to 38.1 from 34 forecast
• EUR French Flash Services PMI also better at 42.9 against 40.1
• EUR German Flash Manufacturing PMI 32.0 as expected
• EUR German Flash Services PMI 45.4 vs, 45.5 forecast
• EUR Flash Manufacturing PMI 34.5 vs. 33.3
• EUR Flash Services PMI 42.5 vs. 41.7
• GBP Prelim GDP -1.5% vs. -1.2%
• GBP Retail Sales better at 1.6% vs.-0.7% called

Event Risk on Tap

• CAD Consumer Price Index

Price Action

• USD/JPY tests 8800 as risk aversion reigns on Nikkei drop of 4%
• AUD/USD follows risk lower to 6400
• GBP/USD hits fresh multi year lows ahead of GDP then drops to 1.3500
• EUR/USD slides towards 1.2800 as risk aversion continues and data offers little help

UK GDP data printed much worse than expected sending pound to fresh multi year lows as the report confirmed that the country has officially entered into its first recession since 1991. The UK GDP showed a contraction of -1.5% versus -1.2% expected as the full impact of the collapse of global capital markets has finally hit the finance driven economy.  

The dour economic news suggests that BoE will almost certainly have to lower its benchmark rates to 1.00% as the next MPC meeting as UK policy makers  desperately try to kick start the hobbled island economy. Pound continued to absorb the awful news with the pair sinking towards the 1.3500 barrier in the immediate aftermath reaction.

The GDP data is no doubt backward looking, but the key question for the currency market consider as we move forward is whether today’s data represents the nadir of the economic contraction of simple the start of long drawn out recessionary cycle. Given the UK’s economy near complete reliance of the UK economy on the financial sector for its growth over the past decade we fear the second scenario is far more likely and while the pound may stage a dead cat bounce in the next few sessions given its woefully oversold condition, further downside is likely as the pressure on the UK economy will only intensify in the first half of 2009.

Turning to North America the focus today will rest squarely on GE’s earning’s announcement due at 11:30 GMT. The equity markets are already spooked by negative surprises from Microsoft, Sony and Samsung so risk aversion is running high. Therefore is GE misses today, the dollar and yen could strengthen even further as appetite for risk will be completely lost.

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.