Currency Watch: New year, new outlook?

The new year is upon us and it has started to resemble the final months of 2011 in some respects, with the European single currency coming under pressure again as the market ponders the probability that a breakup of the currency union may be on.

The currency pairings have reacted, with EUR:USD falling to 15 month lows and GBP:EUR hitting 14 month highs, closing at its peak level since September 2010.

Part of the reason for the resurgent pound has been strong Purchasing Managers Index (PMI) releases from the UK to kick start 2012 with some optimism.

Recent earnings releases from the high street have shown that demand was not spectacular into Christmas and I’m worried that this move higher may be simply a result of price discounting.

If that is the case it would be difficult to maintain into Q1. It would also make the potential fall-off in the first three months of 2012 that much more sharp, and increase the risk of negative figures for Q1 GDP.

That being said, this number does mean that all three PMIs (services, manufacturing and construction) have been better than expected and this allows us to maintain our initial estimate of a Q4 GDP figure of around the 0.1%.

So there may be trouble brewing on the continent, but at the moment the UK seems to be starting off 2012 in fine fettle.

Jeremy Cook is chief economist at World First foreign exchange