UK GDP & BoE

The Pound has recovered back above 1.20 against the Euro and continues to trade around 1.55 against the US Dollar on the interbank market.

Despite UK Gross Domestic Product (GDP) data showing that the UK economy contracted by 0.2% in the final quarter of 2011, the initial market reaction suggests that many expected the data could have been worse.

The recent UK economic data, coupled with the European debt crisis and anaemic global growth points to the UK struggling to avoid entering into another technical recession i.e. two consecutive quarters of negative GDP growth.

Whilst many analysts are hopeful of a mild or shallow recession in the UK, the fragile outlook increases the likelihood of a further expansion of the Bank of England’s Quantitative Easing Asset Purchase Programme (QE). Moreover, minutes released today from the Bank of England’s last Monetary Policy Committee (MPC) meeting held on January 12th indicated that a number of MPC members believed it was a likely a further expansion of asset purchases (QE) would be required, possibly as soon as the next MPC meeting due on the 9th February.

Aggressive QE from the Bank of England would pose a threat to the Pounds value and is one of the factors preventing the Pound forging higher against the troubled Euro. The Pound may be able to hold against a troubled Euro but could struggle against the US Dollar.

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