The sentiment deteriorated last week in the market as pessimism dominated the ambiance following downbeat fundamentals starting with the unexpected GDP figures from euro, followed by weak U.K. retail sales, confirming the downbeat outlook from the Bank of England.
The euro-area recession deepened more than economists forecast as the region’s three biggest economies suffered fragile exports growth, suggesting that Europe’s 17-nation economy is not out of the woods yet.
Euro area released downbeat data
- Euro zone economy contracted in 0.6 percent in the fourth quarter of 2012.
- Germanys GDP slipped 0.6 percent in the fourth quarter from the third, falling short of a first estimate by the countrys federal Statistics office.
- France contracted 0.3 percent in the fourth quarter of 2012.
- Italy’s preliminary fourth-quarter GDP slipped 0.9 percent.
Worse-than-expected quarterly contractions underscore a central problem for the euro bloc as it enters the fourth year of the sovereign debt crisis. However, there is a prevailing confidence that the euro zone is poised to stabilize and return to growth later this year.
European Central Bank President Mario Draghi said last week that confidence in the bloc’s nations has stabilized and the ECB sees a gradual recovery beginning later this year, though the situation remains fragile.
These data added more downside pressures on the euro in the midst of other pressures resulting from the unstable political arena in Italy and Spain, pushing the euro off 1.37 levels - the highest in nearly 15 months.
Data released last week by U.K economy couldn’t bring except new fears and jitter into the market, as the headline rate of inflation, measured by the Consumer Price Index (CPI) stuck at 2.7%, for the fourth straight month, the highest level since May, marking the longest stretch of unchanged prices since the series began in 1996.
The Bank’s quarterly inflation report was nothing but a pressure on the sterling, leaving the door open for policymakers to add more stimulus as the BoE forecast inflation to remain above the target rate for the foreseeable future.
- The Bank of England raised its forecast for annual CPI to an average of 2.3% this year from 1.8% in November.
- The Bank also said Inflation is likely to rise further in the near term and may remain stubbornly above the 2 percent target and to proceed to around 2.5 percent at the end of forecast period.
- The BoE’s inflation report revealed that the British economy is set for a "slow and sustained recovery" over the coming three years.
The British economy is expected to face challenging years ahead as Chancellor of the Exchequer George Osborne said in his Autumn Statement that austerity will have to be maintained for longer period that previously anticipated and debt will start dropping a year later than predicted.
The pound continued to receive bad news and was actually slapped to a new session low of 1.5461 on Friday, as U.K. retail sales expectedly dropped for the second month in January, as retailers suffered a snowy weather that hit food sales, pushing it the lowest level since almost 2004.