EUR/GBP: Triple-Dip Fears Weighing On The Pound

The British pound is foreseen to weaken opposite the euro today as sluggish industrial performance and shrinking manufacturing output have intensified fears of a triple-dip recession. Seemingly confirming the gloom, the National Institute of Economic and Social Research forecast that the economy shrank in the fourth quarter. In contrast, an expected recovery in industrial output across the eurozone is apt to corroborate views that the regional economy has bottomed out.

British industry posted sluggish growth in November, renewing fears that the economy contracted in the final quarter and pushing Britain towards an unprecedented triple-dip recession. The ONS reported last Friday that manufacturing output dropped 0.3 percent in November after dropping 1.3 percent in October, widely missing the 0.5 percent gain estimated by economists.

Although the wider reading of industrial output expanded by 0.3 percent after a sharp decline in October, it still failed to meet buoyant expectations of a 0.8 percent incline. Demand for British goods has been dented by economic uncertainty, sluggish wage growth and deep austerity, while exports have been hit by the eurozone debt crisis.

The UK emerged from recession in the third quarter last year, but a series of grim economic updates, including weak trade data and discouraging PMI surveys have fueled fears of a contraction in the final quarter. Separate figures out from the ONS on Friday added to concerns after it revealed construction output plunged by 3.4 percent in November.

Putting all these together, think tank NIESR said that after removing distortions due to the Olympic Games, the economy’s performance during the year could be best described as flat, down sharply from a 0.9 percent growth in 2011. It estimates that the UK economy shrank by 0.3 percent in the December. Should the economy contract in Q4 and in the current quarter, the UK would enter an unprecedented triple-dip recession.

Over to the eurozone, conditions are not looking as bleak. After leaving interest rates on hold last Thursday, European Central Bank President Mario Draghi provided an optimistic assessment of the eurozone economy, saying it will recover later this year. Echoing his optimism, Eurostat is awaited to announce that industrial output in the bloc rose by 0.2 percent in November, a marked improvement from the 1.4 percent and 2.5 percent plunge recorded in October and September, respectively. Considering these, a long position is recommended for the EUR/GBP trades today.