Currencies DirectJanuary 2013 Analysis

Written By Phil McHugh
Currencies Direct

2013 - A bad start for the pound

It has been a terrible start to the year for the pound which has fallen against its major peers including the euro.

In 2012, the gains in the pound have been a major drag on Britain's export market further hampering growth. Sterling finished the year over 5% higher against the USD, and finished also 2% up on the Euro from the start of the year. The move higher was down to a post-Olympic increase in Q3 GDP and higher inflation figures. The pound also managed to ride a trend of aggressive central bank action by the US Federal Reserve and the Bank Of Japan, which has weakened the USD and JPY respectively and aided the pound. But it looks increasingly likely that Sterling bull has now ran out of steam and this is highly evident with the start to 2013.

The UK economy now seems stuck in a rut and it's unlikely to see much growth in 2013. Government austerity measures, coupled with the likelihood that the Bank Of England will look at further ways to ease make it seem quite likely that 2013 could be a weak year for the pound. We're likely to hear the rumblings ramping up from the credit rating agencies, and the UK's AAA rating could be at risk if economic data continues to disappoint.

UK Retail sales were very disappointing and the pound has fallen further on the news after a torrid start to 2013. Overall the pound has now fallen over 5% against the euro and 4% against the USD. Fourth quarter GDP for the UK contracted by 0.3% and this now lines up the imminent prospect of a triple dip recession which will pile further pressure on the pound.

British high street too is feeling the pinch with HMV and Blockbuster joining Jessops & Comet in administration, putting thousands of jobs at risk. Consumers are not spending and growth is stagnant so a fall in the pound will probably be a good result for the Bank Of England to help alleviate a flat economy that has not responded to measures already implemented.

Adding to the potential misery for the pound is the fact that the Euro is recently outperforming. In Europe, the support from the ECB has been the key driver behind a renewed confidence in the Euro and its periphery. This is reflective in a significant fall in the financing costs that is apparent throughout the periphery.

The Euro has posted impressive gains so far in 2013 following the perception that Europe has cleared significant tail risks and the ECB have moved away for now from a rate cut. The ECB are expected to be less aggressive in 2013 than the Fed and the BOJ which is also euro supportive.

Ironically, the potential repercussion that would come from a flagging pound will be a boon to the British export market. With the Queen's Diamond Jubilee and the Olympics excitement, 2012 was a banner year for Britain. However, all signs point to 2013 being a year for the legendary British stiff upper lip and for a weaker pound.

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