Gloomy outlook for UK economy

Currencies Direct July 21st 2011 - 2 minute read

The Bank of England minutes yesterday presented a cautious, dovish outlook for the British economy with inflation expected to peak over the coming months (do we still believe the bank when it makes these pronouncements?) putting further pressure on household incomes. The market has interpreted the minutes along the same lines as the past few, with the Bank now not expected to raise rates until the final quarter of the year. Playing on the BoE’s mind will be the downgrading of UK growth estimates, with the economy now forecast to grow at just 1.3% in 2011. It looks like the Rogoff & Reinhart description of the aftermath of financial crises – sluggish growth for an extended period – is far more accurate than the market initially gave it credit for. Data this morning was mildly positive, with Sterling up slightly on the back of better than expected retails sales data.

The Euro was boosted as details of a last minute deal between France and Germany hit the wire late yesterday evening and will be submitted to Herman Van Rompuy this morning at the meeting of European leaders. No details of what the agreement is but it will likely be over private sector burden sharing in any further bail-out of Greece. The market will be hanging on every word that comes out of today’s meeting so expect further volatility and rumours throughout the day on the outcome, but the reality is that no new information is likely to emerge. The market will also be closely watching the outcome of Spanish bond auction this morning for both market confidence and to see if the ECB is active in buying bonds.

US debt negotiations are still ongoing and are causing major headaches for the markets as they try to discount both a default scenario and one in which e resolution if found. The second in much more likely, but the trouble is in working out what happens if the first arises

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