Pound euro exchange rate in powerful reversal - UK's economic decline in the second quarter was worse than that of Eurozone 'bad-boy' Spain

Details

Published on Wednesday, 25 July 2012 09:27

Written by Will Peters

International Money Transfers at our sister site

UK GDP decline is worse than that of Spain, but bond markets put a floor under sterling and Osborne comes out with fighting words.

The pound to euro is undergoing a firm reversal in fortunes this morning; At 10:15 AM in London GBP-EUR is 0.62 pct in the red at 1.2777.

It's not hard to find the reason for this. The ONS has reported that second quarter contraction in the UK economy came in at a consensus-busting 0.7 pct. City analysts had penned in a decline of 0.2 pct.

Now compare this to Spain where Q2 contraction came in at 0.4 pct in the second quarter of the year according to the Bank of Spain on Monday.


Spain is grabbing all the headlines at present concerning their debt situation, but remember debt situations are the product of poor economic productivity.

If the UK is declining at a worse rate than Spain, what does our future hold?

The government will be hoping that improved weather and the olympics in this third quarter will help turn the situation around for the economy.

For the pound euro exchange rate the worry now is that the Bank of England will cut interest rates yet further and boost the asset purchase programme.

It is worth noting however that in the bond market UK debt has actually strengthened slightly.

The yield (in general terms, the interest rate) on 10-year gilts is now just 1.44 pct.

No doubt this will continue to put a floor under sterling ensuring that no major sell-off is precipitated.

Chancellor Osborne has also come out fighting:

"We're dealing with our debts at home and the debt crisis abroad. We've made progress over the last two years in cutting the deficit by 25% and businesses have created over 800,000 new jobs.

"But given what's happening in the world we need a relentless focus on the economy and recent announcements on infrastructure and lending show that's exactly what we're doing."