Two thousand twelve has truly been a crazy year for the pound. With the year coming to an end, I thought it would a be good idea to walk down memory lane and revisit the three most important events in the U.K.
In 2011, the U.K. was at the forefront of popular culture as millions of people tuned in to watch the Royal Wedding of Prince William and Catherine Middleton. This year, the U.K. once again dominated the headlines as London hosted the 2012 Olympics.
The Olympics drew in hundreds of thousands of people to the U.K.’s capital, bringing with them a lot of economic activity. It is estimated that the U.K. spent approximately $8 billion ahead of the games and another $9 to $11 billion during the event itself.
Then, over the next five years, the U.K. is expected to generate an estimated $1.5 billion in tourism revenue.Two thousand twelve has truly been a crazy year for the pound. With the year coming to an end, I thought it would a be good idea to walk down memory lane and revisit the three most important events in the U.K.
Let that sink in for a few seconds.
8,000,000,000 + 11,000,000,000 + 1,500,000,000…
Yes, that’s a whole lot of money and economic activity just for a one-month event. While the increased economic activity didn’t directly translate to a stronger pound, I think it’s safe to say that the games left a positive legacy not only for the U.K.’s economy, but for its public image as well.
Economy Plunges into a Recession
Unfortunately, not everything was sunshine and butterflies for the U.K. In the middle of Q2, it was reported that growth contracted during Q1. It was, to say the least, very disappointing news for the market as it meant that the U.K. has fallen into a technical recession. The last time the U.K. experienced two consecutive quarters of negative growth was in 2009.
Thankfully, the recession did not last long as the U.K.’s economy grew during Q3. According to the National Statistics Office, the country grew 1.0%, opposite the 0.4% contraction it experienced in Q2.
In addition, the published figure was considerably above the market’s 0.6% growth forecast. The positive result was welcomed by the market with open arms and helped keep GBP/USD above 1.6000.
BOE Expands Quantitative Easing Program… Twice
It wasn’t only the Federal Reserve that was aggressive with monetary policy this year. The Bank of England (BOE), too, brought out the big guns.
In its February meeting, the BOE said that it would fire up the printing presses again and expand its quantitative easing program by 50 billion GBP. The move put the central bank’s total asset purchase program to 325 billion GBP.
In the meeting minutes that followed, it was revealed that the bank chose to inject more money to bolster a frail economy and protect the country from the possible fallout from the euro zone debt crisis.
Then, in July, the BOE threw another 50 billion GBP at the ailing economy, increasing the bank’s asset purchase program to 375 billion GBP. This time, the central bank pointed to “tight credit conditions and fiscal consolidation” as well as the “increased drag from heightened tensions within the euro area.”
Between these two events, GBP/USD became the forex market‘s whipping boy. The pair was bled dry as it fell more than more than 1,000 pips from its high at 1.6300 to 1.5268 (this level actually became GBP/USD’s second lowest level this year).
GBP/USD’s suffering only ended in July, when market participants were able to fully price in the bank’s ultra-easy monetary policy. I’d also give credit to the Draghi, when he said that the ECB would do whatever it takes to preserve the euro.
From the London Olympics, to a recession, and to two quantitative easing programs by the BOE, we can say that 2012 was truly an eventful one for the pound. But despite the ruckus, the market participants seem to be very confident in investing their money in the pound.
In fact, GBP/USD is now trading near its highest level this year, and it looks like it will go even higher! Will GBP/USD continue to rally in 2013? Ah… That’s something we all will just have to wait and see.