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.

Report by Alistair
Cotton

Written by
Currencies Direct

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