Contraction causes negativity, but sterling stands its ground

26 July, 2012

Bad news for sterling yesterday, as figures showed that the UK economy contracted by 0.7 percent during the second quarter, its sharpest decline for three years, and more than three times the 0.2% fall anticipated by many economists – with most of the fall being attributed to a slowdown in the construction sector. However, the Office of National Statistics was quick to note that the contraction may have been exacerbated by the poor weather of the previous few months, as well as the extra bank holidays in June. This had led some to believe that the fall does not signal as much disaster for the UK economy as the figures state. Nonetheless, it has displayed the weakness in the economy, increasing the predictions for further QE, causing the rate for exchanging sterling to euros to fall away slightly from the 3 1/2 year highs we’ve been seeing.

However, the weakness in the Eurozone causes sterling rates against the European currency to remain strong, with many now looking closer at Spain’s worries. Many analysts now fear that Spain may require a full bailout in the near future, especially since the austerity measures introduced by the Spanish government have been incredibly unpopular with Spanish citizens. Both Spain and other EU countries realise something must be done about these concerns before the situation can get any worse, with both the French Finance Minister Pierre Moscovici and the Spanish Economy Minister Luis de Guindo saying in a joint statement – “The swift implementation of the financial assistance programme is essential to restore confidence and recreate conditions for growth”. However, Germany, seen over the entire crisis as being the economic powerhouse of Europe, seems to be having its own concerns, with ratings agency Moodys threatening to downgrade Germany’s credit rating. The problems in Greece seem to have taken a back seat, as German Economic Minister Philipp Roesler, saying: “If Greece no longer meets its requirements there can be no further payments…a Greek exit has long since lost its horror.”

The Euro did see a small increase against the US dollar on Wednesday, which, in turn, gave sterling a small boost against the American currency. However, these small gains were in turn reduced on the announcement of negative UK data.

Anyone concerned about the weakness of sterling caused by the latest releases, and how it may affect any currency requirements in the future, should call Currency Index for advice, and to ensure they get the best rate when the time comes to make a transfer.