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Currency watch: No need to panic
UK growth, or the lack of it, dominated the markets this week.
It was obvious that the relatively solid numbers from last quarter’s services sector have been completely undermined by falls in the manufacturing and industrial sectors.
Manufacturing output fell by 0.9% – in keeping with the purchasing managers’ surveys that have been showing slight contraction through the end of 2011 – while the services sector stayed flat.
The high street wasn’t lying; things are tough for retailers at the moment. The second factor is that most of the surveys are likely to have come from October which was, according to the Purchasing Managers Index indicators, the lowest ebb of the manufacturing cycle in Q4 and improvements were seen later through December.
Despite the obvious disappointment of this initial GDP figure, we think that this is just a blip and a double-dip recession in the UK is not on the radar.
Preliminary figures are always volatile and the possibility of an upgrade over the coming months is possible.
We will, however, see higher unemployment and lower business and consumer confidence in the short-term. Cue further calls from the members of the opposition that the coalition cannot keep cutting as it is.
The Bank of England has also published its latest meeting’s minutes this week and as ever they make for some interesting reading.
The Monetary Policy Committee said that there had been some positivity in the past month, but that uncertainty remains.
The main headline is that some members of the committee are saying that further quantitative easing is likely in the future. We expect a further injection of £75bn in February absent to a solution to the eurozone situation.
The big move this week came from the US, as the Federal Open Market Committee announced that it was prepared to keep rates low until at least late 2014.
Equities rallied, treasuries also kicked higher and the dollar tumbled, pushing EUR/USD and GBP/USD higher.
This will leave the dollar as the funding currency for carry traders when times are good, and will probably keep the risk-on/off matrix trading too throughout the next couple of years.
Jeremy Cook is chief economist at World First foreign exchange