Currency watch: Increasingly rocky road ahead

Sterling pushed to a two-month high against the euro this week despite a GDP figure that showed a sharp fall in consumer spending.

While it is good news that the figure was positive at 0.5%, the component parts are showing that the road is looking increasingly rocky for the UK.

Consumer spending fell by the highest amount since the second quarter of 2009, decreasing by 0.6%, as the average consumer remains stuck between price rises and fears over service and job cuts from the coalition government.
 
Business investment also fell by 7.1%. Government spending rose by 1% but we all know that we will be unable to rely on this over the next few years. The private sector is not stepping up yet to fill the gap it seems.

One bright spot were export numbers, which are higher as businesses are taking advantage of the weak pound. Meanwhile imports are lower, which may suggest a moderation of imported commodity inflation.
 
So while we looked at the data and thought sterling may be set for a fall, it pushed to an eight-week high of 1.1584 before sliding back overnight after Asian markets decided today was a day to buy up risky assets.

Equities have been broadly neglected this week, as traders didn’t want to get overly committed to anything as the potential for sudden and violent shocks to the status quo are all too likely at the moment.

So despite some signs of optimism this week, the reality is that no one is likely to be breaking out the bubbly anytime soon.  
 
Jeremy Cook, chief economist at World First foreign exchange, 27.11.2011