Market awaits UK GDP figures at 9:30 as US consumer confidence slips in April

Tom Tong25/Apr/2012Currency Updates

GBP

Sterling climbed to its highest in two-and-a-half years against a trade-weighted basket of currencies on Tuesday, lifted by its robust performance against the euro and the dollar as it remained a popular
alternative to a troubled euro zone.

The pound hit a 20-month high against the euro and a near six-month peak against the dollar, extending its recent gains made on the back of data showing an improvement in the UK economy, as well as investors pricing out the likelihood of more quantitative easing by the Bank of England.

However, having advanced strongly in the past week, some investors were cautious ahead of UK gross domestic product data for the first quarter due out this morning. The data is likely to show the economy grew a modest 0.1 percent after shrinking 0.3 percent in the last quarter of 2011.

All eyes today will be on Q1 UK GDP figures at 9:30 this morning for which analysts are forecasting a risk of GDP showing a further contraction due to very weak construction output. However,any losses for sterling may only be short-lived given a much more worrying euro zone economic outlook.

USD

The US dollar weakened on Tuesday against the euro as traders kept an eye on the two-day meeting of Federal Reserve policymakers which will conclude today. The Fed’s policy board began meeting on Tuesday amid more signs of the economy’s tepid growth: still-weak home sales and a drop in consumer confidence.

Most analysts assume the central bank will keep its ultra-low interest rate policy unchanged, but eyes will be out when they release their report on Wednesday for signs of whether they think more stimulus is needed for growth.

The dollar fell against most other major currencies on Tuesday after U.S. consumer confidence slipped in April and home prices fell in February. Traders also bought the euro following strong demand at an auction for Spanish government debt.

The dollar rose against the euro on Monday as worries about Europe’s debt crisis intensified. Those fears eased on Tuesday after Spain was able to sell a better-than-expected $2.6 billion in debt. The
country’s benchmark yield slipped below 6 percent on Tuesday; a sign that investors are less worried about the Spain’s finances.

Today, traders will be closely monitoring the Federal Reserve statement after its two-day policy meeting ends. Fed Chairman Ben Bernanke will also hold a press conference Wednesday afternoon.

Economists don’t expect the Fed to make any changes to its policy, but traders are looking to see if the Fed hints as to whether it may need to take further steps to boost the economy.

EUR

On Tuesday, eurozone industrial new orders printed a 1.3% contraction for February and disappointed the market’s expectations of a 1.4% rise. The Belgium NBB Business Climate index for April also failed to impress when it showed that business conditions in the country are worse than analysts expectations. The actual figure came in at -10.7 while the forecast was for a more modest contraction at -8.3.

On top of those reports, the political crisis in the Netherlands also seems far from over! The Dutch parliament is due to receive another set of austerity measures today and a few market commentators have expressed concerns and are worried that more policymakers could walkout.

Luckily for the euro, Spanish bond yields remained below 6% yesterday.

It also seemed like investors were more concerned about the forthcoming FOMC statement than shaddows cast by poor eurozone data and political events in the Netherlands. Some economic reports
released from the U.S. yesterday also fell short of expectations.

Consequently, these sparked speculation amongst traders that Fed Chairman Ben Bernanke could show his dovish side in today’s statement.

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Written by Tom Tong

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