Pound Euro Dips as UK Recession Confirmed, Sterling Below 1.17

February 15, 2024 - Written by John Cameron

STORY LINK Pound Euro Dips as UK Recession Confirmed, Sterling Below 1.17

UK data on Thursday confirmed that the UK dipped into technical recession for the second half of 2023.

The Pound registered limited net losses with the Pound to Euro (GBP/EUR) exchange rate retreating to 1-week lows at 1.1690 before trading just below 1.1700.

According to MUFG; “It looks like light EUR/GBP shorts had been built up on the potential for a break of the 2023 low so positioning could see GBP weakness extend over the short-term.”

ING added; “we stick by our baseline view that this 0.8500 area in EUR/GBP will be major support.” (1.1765 resistance for GBP/EUR)

A lack of confidence in the Euro-Zone growth outlook limited potential Pound selling.

According to the latest ONS data, UK GDP declined 0.1% for December.

Monthly data was slightly better than expected, but fourth quarter GDP declined 0.3% compared with expectations of a 0.1% contraction as October and November figures were revised down.

The third-quarter estimate remained at -0.1% and the economy therefore registered a technical recession for the second half of 2023.

For 2023, the economy recorded marginal growth of 0.1% after 4.3% growth in 2022.

ONS director of economic statistics Liz McKeown commented; “Our initial estimate shows the UK economy contracted in the fourth quarter of 2023. While it has now shrunk for two consecutive quarters, across 2023 as a whole the economy has been broadly flat.

She added; “All the main sectors fell on the quarter, with manufacturing, construction and wholesale being the biggest drags on growth, partially offset by increases in hotels and rentals of vehicles and machinery.”

Household expenditure fell by 0.1% in real terms in the fourth quarter of 2023, after a downwardly revised fall of 0.9% in Q3.

There was also a negative impact from trade with export volumes declining 2.9% in the fourth quarter of 2023 with a 6.0% slide in services exports more than offsetting a 0.8% in goods exports.

Weak exports will reinforce long-term concerns over the outlook.

According to Alex Veitch, director of policy and insight at the British Chambers of Commerce; “Businesses were already under no illusion about the difficulties they face, and this news will no doubt ring alarm bells for Government.”

He added; “The BCC’s last Quarterly Economic Forecast suggests annual growth below 1pc for the next two years as firms remained gripped by uncertainty and the twin perils of high inflation and interest rates remain.”

In comments this week, Bank of England (BoE) Governor Bailey played down the impact of any technical recession as he concentrated on forward-looking indicators which had generally been more positive.

In this context, there is likely to be only limited on BoE policy.

Following the data, markets priced in around 75 basis points of interest rate cuts in 2024 compared with 70 basis points ahead of the data.

According to Ruth Gregory, deputy chief economist at Capital Economics; “Today’s release is more politically significant than it is economically. At the margin, it might nudge the Bank of England a little closer to cutting interest rates. But we doubt the Bank will be too worried about what is likely to be a mild and short recession.”

ING added; “With the UK services PMI recently heading higher, first quarter GDP for this year should be better. Understandably there will be a lot of focus on the January retail sales data tomorrow after the sharp 3.2% MoM drop in December.

In the political context, there will be additional pressure for more aggressive tax cuts in the March budget.

There have been reports that Chancellor Hunt will cut medium-term spending targets in order to give additional headroom for tax cuts.

If these reports gain traction, reaction in the gilts market will be watched very closely.

According to ING; “There is a hint again that the UK government is committed to tax cuts but struggling to find their funding. Any gilt underperformance could weigh on sterling too.”

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TAGS: Pound Euro Forecasts