U.K.'s First Economic Contraction Since 1992 Pounds the Pound

The British pound suffered another super massive blow today (Friday) after the release of the UK GDP report which showed that the UK economy is in deep trouble. The economy shrank by 0.5% in the three months to September (-0.2% expected) -- the first contraction since the second quarter of 1992. The contraction is the largest since 1990. To illustrate the gravity of the pound’s fall from grace, GBP fell more than 1000 pips today against the US dollar, plunging from 1.6330 to below 1.5300 intraday - all in less than one day!

60-min chart of GBP/USD

The Pound’s decline is fast and furious, but that is by no means any indication whatsoever of it being “oversold”. Sure, bounces can occur, but still the medium term outlook of the once-solid currency is very pessimistic. A few days ago, BOE’s Mervyn King and UK PM Brown already sounded warning of an impending UK recession, using the word ‘Recession’ for the first time. Now, it just seems surreal. The FTSE dropped as much as 9% down. Interest rates in the UK will definitely be slashed, and that will strip off more sheen from the pound. The Brits will have a very hard time now, trying to deal with falling values of their properties and their currency.

USD/JPY also plummeted today, dropping more than 700 pips from 98.10 to below 91.00 during the Asian trading session, as institutional traders pulled out more from the carry trade as Asian stock markets spilled blood. Nikkei fell 9.6%; STI fell more than 8% today.

The Australian dollar also fell sharply against the US dollar today on news that three Aussie investment companies, namely, Everest Babcock and Brown, Perpetual Ltd. and Axa Asia Pacific, have suspended redemptions on their funds after a record percentage of their investors pulled their money out of the funds.

The US dollar (except against the Yen) remains the Hercules of the currency world.

Comments

[OldLimey:]

"The Brits will have a very hard time now, trying to deal with falling values of their properties and their currency."

Naaah. The economy's 'fundamentally sound'. Brown and Darling said so. Must be true.

2008 Oct 25 10:43 AM