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Sterling Under Pressure as GDP Weakens

By Peter Nurse

Investing.com - Sterling was under pressure in early European trade Tuesday, with the release of the final gross domestic production figure suggesting that the contraction in the first quarter was deeper than originally estimated.

The U.K.’s GDP dropped 2.2% in the first quarter of 2020 due to the Covid-19 outbreak, according to a revised estimate released by the Office of National Statistics Tuesday.

This figure was revised downward from the previous estimate of a 2% decline and marks the joint largest quarterly contraction of the U.K. economy since 1979.

At 3 AM ET (0700 GMT), GBP/USD was down 0.2% at 1.2276, just above the one-month low of 1.2252 on Monday, and down almost 2% over the last week. EUR/GBP fell 0.1% to 0.9133, after climbing to a three-month high of 0.9175 on Monday, and is up 1.6% on the week.

The pound has been weighed down by a number of factors of late, not least is the economic damage caused by the shutdown associated with the coronavirus and the way the government has handled the outbreak.

There are concerns about how Britain's government will pay for its planned infrastructure program following Prime Minister Boris Johnson's promise to increase spending. Johnson is due to give a keynote speech on the topic later Tuesday.

"This is the moment for a Rooseveltian approach to the U.K.," Johnson said Monday, referring to former U.S. President Franklin D. Roosevelt's ‘New Deal’ program, whose job-creating public works projects helped the United States recover from the Great Depression.

On top of this, there is great uncertainty surrounding Britain’s trading relationship with the European Union as little progress has been made on agreeing a trade pact.

“Indeed, the most senior government official (considered a soft Brexiteer) is now being replaced by more hawkish David Frost, the U.K.’s chief Brexit negotiator,” said analysts at Danske Bank, in a research note.

Elsewhere, the dollar index, which tracks the greenback against a basket of six other currencies, was up 0.1% at 97.645. EUR/USD fell 0.3% to 1.1212, while USD/JPY was up 0.1% at 107.64. 

The greenback has seen demand as a safe haven as the Covid-19 pandemic showed no signs of adapting, while the “worst is yet to come” given a lack of global solidarity, Tedros Adhanom Ghebreyesus, head of the World Health Organization, said at a briefing in Geneva Monday. 

Additionally, U.S. Federal Reserve Chair Jerome Powell said late on Monday the outlook for the world's biggest economy is "extraordinarily uncertain" and will depend both on containing the coronavirus and on government efforts to support the recovery.

 

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