The worse performer of the day has been the British pound, which fell more than 250 pips against the US dollar from a high of 1.8770 towards 1.8500, more than erasing Thursday’s gain. Friday’s release of UK GDP was worse than expected, coming out at 0%, compared with a previous estimate for growth of 0.2%, worse than the +0.1% growth expected. When the market saw that the UK economy registered no growth in the second quarter, and that the economy grew only 1.4% from a year earlier - the smallest expansion since 1992 - short sellers took the chance to short the Pound.

Weakness was seen in virtually every sector, ranging from business investments, which saw a whopping 5.3% drop (the most in 23 years) to household spending which posted the first decline since 2005.

Since the start of this year, the financial markets have been focusing on the US economy and debating whether the US would tip into a recession. Now, attention is turned towards the UK and the Eurozone. If we compare the UK’s GDP with that of the US and the Eurozone, the UK’s annual rate of growth is actually the lowest, lower than the US’s GDP growth of 1.8% over the same period and Eurozone’s 1.5% pace of expansion.

The whole subprime mortgage collapse in the US has spread, and the UK is not spared. UK banks are reluctant to lend money to business owners and property buyers, which in turn is having suffocating effects on the housing market and business landscape. What complicates the BOE’s task is that the cost of living has increased, just as prices of property are falling. According to mortgage lender HBOS, UK home prices fell 8.8% in July from a year earlier, the biggest decline in at least 25 years.

The Bank of England’s MPC is likely to rethink their stance on the Bank’s interest rates amidst such disappointing economic figures, especially BOE hawk Besley who had voted for a rate hike. Traders are thinking rate cuts; business lobby groups are asking for rate cuts, so perhaps the MPC may vote for a rate cut as soon as November this year. The British pound has only one way to go in the long-term: down.

If stops are triggered below 1.8480, traders could potentially drive GBP/USD down by another 100 pips. Meanwhile, the US dollar is also up against the Swiss franc, Euro and the Japanese yen Friday, although it is posting its first weekly loss versus the Euro in six weeks.

Economic Calendar For Monday:

US existing home sales 1400 GMT

New Zealand trade balance 2245 GMT

Posted in Categories: Economy, Eurozone, Forex, Japan, New Zealand, Switzerland, UK, USA, Videos.

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