Sterling slumped to a fresh eight-month low against the dollar on Thursday as disappointing UK growth data capped a wave of soft economic news.
Economic growth in the first quarter of 2005 was revised down to 0.4 per cent quarter-on-quarter from 0.5 per cent.
Furthermore, a series of downward revisions to prior data meant the rate of growth in the year to the first quarter was slashed to 2.1 per cent from the initial estimate of 2.7 per cent.
The downgrade was essentially due to an upward revision of the gross domestic product deflator, a measure of inflation. But nevertheless it was seen as intensifying expectations for an imminent rate cut, particularly as the data came hot on the heels of Wednesday’s gloomy UK retail sales figures.
“The sharp slowdown makes an August 25-basis-point rate cut look increasingly likely, although a cut next week can’t be entirely ruled out,” said James Knightley, economist at ING Financial Markets.
Daragh Maher, senior forex strategist at Calyon, added: “The debate should be shifting to the possibility of a July rate cut, and with only 3 basis points of easing priced in for that meeting, the risk-reward of speculating on an immediate cut looks attractive.”
Investec Securities slashed its 2005 growth forecast to 2 per cent from 2.6 per cent and brought forward its forecast for an initial rate cut to August from February 2006.
Sterling’s rally since the autumn of 2003 has been largely fuelled by its attractive yield. This makes the currency vulnerable to lower rate expectations, especially when the US is raising rates.
“The market can slam a currency quickly if it believes that a fundamental shift in interest rate psychology could be afoot,” said Tony Norfield, global head of forex strategy at ABN Amro.
Steven Saywell, chief currencies strategist at Citigroup, said that sterling looked “overvalued” against the main European crosses. Mr Saywell advised his clients to build a long euro/sterling position, anticipating a move to £0.688, the 200-day moving average.
With UK housing and current account data yesterday also on the soft side, by late London trading the pound had lost 0.8 per cent at $1.7929 against the dollar, 1 per cent at £0.6747 to the euro, 0.7 per cent at SFr2.2995 against the Swiss franc and 0.2 per cent to Y198.85 against the yen.
The yen was also soft, slipping 0.5 per cent to an eight-month low of Y110.92 against the dollar.
Derek Halpenny, senior currency economist at Bank of Tokyo-Mitsubishi, attributed much of the move to the fact that Wednesday’s break above the psychologically important Y110 barrier against the dollar failed to elicit heavy dollar-selling by Japanese exporters. Mr Halpenny also seized on data that showed Japanese investors purchased a net Y1,770bn of foreign bonds in the week to June 24, the largest weekly outflow since September 2004. The Japanese have now bought a net Y8,000bn of foreign bonds in the first quarter of the fiscal year.
“That scale of buying is unprecedented,” he said. “Japanese investors are eager to enhance their yield pick-up and are willing to buy dollars even at these levels.”
Against the euro, the dollar was at $1.2103 in late New York trade. The greenback initially firmed slightly after the Fed raised the Fed funds target - as expected - to 3.25 per cent and signalled that it would continue is “measured” rate increases, but faded as investors reportedly covered short positions ahead of the long weekend.
“More than a few are apparently stretching the three day weekend into a four day affair, with liquidity likely to be at a premium [today],” said Ronald Simpson at Action Economics.
Additional reporting by Jennifer Hughes in New York
