GBP Fundamental Analysis-24 July 2009

By William Doody
The British Pound surrendered early gains as economic data revealed continuing problems for the U.K. economy. The Office for National Statistics in London reported that U.K. GDP shrank 0.8% in the second quarter, more than twice the amount economists had forecast. Coupled with better than expected Eurozone manufacturing data and several strong corporate earnings reports in the U.S., the data suggest that the U.K. is beginning to far significantly behind its peers as the recession turns towards recovery. The data also raise the possibility that the Bank of England will be forced to backtrack on their previously announced plans to suspend further quantitative easing and would instead have to further devalue the Pound. In recent trade activity, Sterling lost 0.62% against the Euro and 0.11% against the Dollar.

We reiterate our concerns about the safety of the Pound. The recent data make increasingly clear that the U.K. is falling behind both the EU and the U.S. in its pace of economic recovery. In fact, this morning’s GDP figures call into question the entire notion of a substantial recovery in Britain. It now seems almost certain that the Bank of England will be forced to maintain extraordinarily low interest rates for the foreseeable future and we would not rule out the possibility of additional quantitative easing. For all these reasons, we would maintain a bearish posture towards the Pound. The ideal trade would be long Euro and short Pound.