The British pound weakened after UK GDP preliminary GDP data came in much worse than expected, showing the economy contracted in the first quarter of 2012, signalling a recession.
The UK Office for National Statistics released growth numbers, that post GDP growth dropped by 0.3 percent, despite forecasts for a 0.1 percent growth. The previous quarter at the end of 2011 was revised to a 0.3 percent contraction in growth.
The main driver behind the drop in growth figures was the biggest fall in construction output in three years coupled with anaemic service sector growth and a fall in industrial output.
The soft growth data are a blow to the British government which is trying to eliminating the UK’s huge budget deficit over the next five years.
Until today, speculation was that the Bank of England appeared less keen to introduce more monetary stimulus, and so would not likely expand quantitative easing through asset purchases. This was based on the fact that inflation was still above target and proves to be sticky.
This speculation has helped strengthen sterling his week to six-month highs against the dollar and twenty-month highs against the euro.
However, after today’s disappointing data, sterling fell. GBPUSD tumbled to 1.6080 from 1.6169 and EURGBP rose to 0.8220 from 0.8172.