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UK Growth Forecast Raised

The newly formed office of budget responsibility is expected to raise its growth forecast for this year, though some economists think the projections may be too optimistic. The annopuncement is unlikely to spur much foreign exchange volatility this afternoon but economists do pay attention to the forecast when delivering future trading models.

The Office for Budget Responsibility is expected to raise its 2010 growth forecast to around 1.8 percent from 1.2 percent, borrowing this year could come in below the previous forecast of 149 billion pounds. If the figures stand up to scrutiny then this could set the tone for the pound well into 2011, the market might stop speculating on more quantitative easing and focus on higher growth and higher interest rates.

Its current 2011 GDP growth forecast of 2.3 percent seems a bit too good to be true when we consider the consensus forecast is only 1.9 percent.

“The upward revision to growth this year might be accompanied by a small downward revision in the forecast for public sector net borrowing, but we do not expect the revisions to give rise to any notable changes to the government’s fiscal plans,” said Simon Hayes at Barclays.

Finance minister George Osborne has pledged to cut the record deficit of 11 percent of GDP in four years.

Data released this morning showed house prices in England and Wales dropped 1.1 percent in November from a year earlier, according to a Hometrack survey, as demand fell at the fastest rate since January 2009, forcing sellers to cut prices to secure a deal. The Forex market hasn’t responded too much to this due to the untimely nature of the announcement couple with the credibility of the Hometrack survey and seasonal fluctuations in the housing market.

“Sterling will continue to take its cue from economic data, as the market weighs the risk of further quantitative easing, given the Bank of England’s three-way split” on monetary policy, RBC’s Cole said.

The Dollar continues to benefit from the resurgence in risk aversion and has managed hold onto most of the gains it saw last week. The pound has dropped below the 100 daily average which on a technical level could signal a reversal of the long established upward trend.

Clients with Dollar requirements over the next few months should consider buying now to mitigate any further losses from the strengthening Dollar.