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Recession fears up as UK GDP shrinks for first time in 7 years

The Pound is close to parity with the Euro while UK economy gets close to recession.

Recession fears grow as UK GDP shrinks for first time in 7 years

UK GDP for the second quarter of 2019 has shown decline, according to the latest data from the Office for National Statistics (ONS) released last Friday, 9 August.

A slowdown in annual growth and industrial production caused the Pound to dip to around 1.07 against the Euro, which is a nine-year low, and to a 34-month low of below 1.2050 against the Dollar. If UK GDP shrinks for two consecutive quarters, the UK will enter a recession.

With current levels, there are speculations the GBP/EUR pair could reach parity and 1.10 against the greenback in the event of no-deal Brexit. This leaves markets even more confident that the Bank of England (BoE) would cut rates before the end of 2019.

The Brexit turmoil is not going anywhere as fears of a disorderly departure and speculation whether the UK is likely to have an early general election are up.

The Pound started the day a little higher following reports that Boris Johnson will meet with Irish Prime Minister Leo Varadkar in the near future to try and break the Brexit deadlock. There are also speculations that MPs plan to force Johnson to seek a Brexit extension to avoid crashing out of the European Union. A Bloomberg survey of 13 banks suggested that there was a 30 per cent chance that Britain will leave the EU without a deal.

The UK will release employment data tomorrow, 13 August, inflation figures on Wednesday and retail sales data on Thursday, 15 August. The releases may help the Pound, providing they come in above expectations. But in the light of Brexit uncertainty, any rallies might be short lived.

In Europe, Italian politics are back following Deputy Prime Minister Matteo Salvini’s call last week for a no-confidence vote in Prime Minister Giuseppe Conte and an early election. Salvini has threatened to pull his ministers from the government if the parliamentary debate on his proposed no-confidence motion is delayed until next week.

As for the Chinese Yuan, China took the market by surprise, having failed to defend the currency allowing it to move to levels below 7 against the Dollar. The drop is seen as a reaction to the latest round of tariffs US President Donald Trump threatened to impose on China on 1 September.

In the US, Trump continued his attack on the Federal Reserve with a call for an interest rate cut by a full percentage point. He also said he would not devalue the greenback, which provided only a slight respite for the currency.

Meanwhile, trading in Asia is a bit thin on the ground due to public holidays in Japan and Singapore.

A number of key economic reports are due this week, with the US Consumer Price Index (CPI) and inflation data tomorrow, 13 August and US retail sales data, month-on-month industrial production and regional Fed surveys on Thursday, 15 August.

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