British Pound Sterling: Currency shrugs off news that recession is deeper than previously thought, advances vs EUR, AUD

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Published on Thursday, 28 June 2012 09:30

Written by Will Peters

"Indeed, there are still numerous factors likely to constrain the recovery going forward, not least tight credit conditions" - Vicky Redwood at Capital Economics.

The pound sterling (Currency:GBP) is being driven by the ebb and flow of risk sentiment on global markets this morning.

The pound euro exchange rate is 0.2 pct in the blue at 12514. Sterling has advanced back above 1.25 in line with a fresh bout of fear that has overcome the financial markets this morning. (Latest pound euro forecasts are on our IMT site, access free via this Facebook pathway).

The pound dollar exchange rate is now 0.06 pct in the red 1.5599. In line with the above-mentioned risk-off move, the US dollar has retaken ground as it is preferred as a safe haven ahead of the pound.



The pound Australian dollar is 0.08 pct in the red, GBP-AUD is seen at 15433. This represents a bounce higher for sterling, could we see an end to the recent falls in this pair.

It was a positive start for the likes of the euro and Aussie dollar this morning, as Asian markets edged higher in a void of bad-news flow.

So what has driven the fresh bout of risk avoidance amongst investors this morning?

It's all down to the Eurozone crisis, surprisingly! Spanish 10-year government bond yields are back above 7 pct while Italian bonds are also up, at 6.28 pct.

The debt crisis continued to sap business confidence in the eurozone this month - the European Commission's economic sentiment index slipped by 0.6 percentage points to 89.9. The fall was bigger than expected.

The British pound continues to be a safer alternative to the euro and other currencies aligned to the ebb and flow of risk sentiment on global markets.

It is because of this that sterling has shrugged off some pretty poor GDP numbers.

Britain's economy shrank by 0.3 pct between January and March, leaving the nation in its second recession in four years, the Office for National Statistics has just confirmed.

But the contraction in the fourth quarter was worse than previously estimated, at 0.4pct rather than 0.3pct.

Vicky Redwood at Capital Economics says we could expect further poor GDP figures for the second quarter:

"But given the negative impact of June's extra bank holiday, GDP is likely to have contracted again in Q2. Indeed, there are still numerous factors likely to constrain the recovery going forward, not least tight credit conditions.

"This morning's Bank of England survey showed that lenders expect to widen lending spreads further in the next three months. Overall, we still expect GDP to contract this year by 0.5 percent.'