British Pound Crashes on GDP 0.5% Contraction

By: Nadeem_Walayat

The British Pound Crashed following the worse than expected GDP data that showed that the UK economy contracted by 0.5% in the third quarter which was against consensus forecasts of 0.2% and the Market Oracle forecast for a 0.3% drop. Anything worse than 0.3% was expected to lead to panic selling of sterling which is what transpired. The British Pound fell from an already depressed level of £/$1.61 all the way to £/$ 1.5250 a drop of more than 8 cents which represents the largest intra-day drop since exchange rates started to float freely following the collapse of the Bretton Woods system in 1971 due to trade imbalance strains.

The crash in the British Pound of 28% from a peak of £/$2.11 to £/$1.52 is highly inflationary as commodities and much of international trade is generally priced in US Dollars, therefore over the last 2 months the fall in sterling will tend to feed through into higher forward inflation about a year from now.

Sterling has been extremely oversold since hitting £/$ 1.60 however when a currency is in freefall which is where sterling is at this time, it is difficult to call any kind of technical bottoms as corrective rallies can evaporate in a matter of hours as panic again leads to further selling.

Yesterdays analysis - UK Economic Crash Follows Housing, Stocks and Sterling Over the Cliff, pointed out the key factors involved and consequences of a sharp drop in GDP. The bad economic data confirms the Market Oracle forecast for deep interest rate cuts from 5% to the target rate of 3.25% by September 2009, with the next scheduled cut of 0.5% at Novembers MPC meeting. Given the speed of crash being observed in the economy, If anything this suggests that interest rates could now be cut to below 3%, hence the collapse in sterling.

The sharp GDP contraction of 0.5% in the third quarter does not bode well for subsequent quarters and immediately signals a trend that could see the UK contract by more than the 1990's recession that totaled a drop in the official measure of GDP of 2.5% over 2 years. The stock market immediately moved to discount the worsening recession prospects with the FTSE crashing by 9% to below 3,800, later rallying to close down 5% at 3883.

The in-depth UK GDP forecast for 2009 will be generated over the weekend, subscribe to our always free newsletter to get this and other scheduled forecasts in your inbox on the day of publication.

By Nadeem Walayat
http://www.marketoracle.co.uk

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Nadeem Walayat has over 20 years experience of trading, analysing and forecasting the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 150 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

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