UK officially enters a double dip recession as the Fed give mixed messages over monetary policy in the US

Tom Tong26/Apr/2012Currency Updates

GBP

The major news yesterday was of course the announcement that the UK has returned to recession, following the release of the Q1 GDP growth numbers. This followed a fall of 0.3% in the last quarter of 2011. The Office for National Statistics has blamed these poor growth figures on a sharp fall in UK construction output.

As expected, the markets reacted immediately with sterling falling dramatically against all major currencies. Since the pound’s recent strength was fuelled by expectations of a positive Bank of England report, the disappointing GDP figures weighed on the pound especially heavily. Losses were however limited by the view that Britain still has a better outlook than the neighbouring Eurozone and the U.S. The result was a strengthening of sterling against the euro and Greenback in the latter half of the day. And so, whilst Q1 has not been particularly good for the UK, on paper, the Bank of England has indicated they are willing to look forward, and this has been mimicked in the markets.

EUR

Yesterday saw the euro hit a 3-week high against the dollar, which was helped by lower Eurozone peripheral bond yields, stronger company earnings, and finally with the expectation that the U.S. Federal Reserve would keep interest rates very low. Despite continued problems throughout the Eurozone with the addition in the past few days of new political uncertainty in France and the Netherlands, the euro has remained surprisingly resilient, especially against the dollar. The euro has opened today above 1.32 against the dollar in a reaction to yesterday’ Federal Reserve announcement, indicating that the U.S. recovery will be slow.

USD

The U.S. Federal Reserve gave mixed messages yesterday at its press conference, indicating that the economy is slowly improving, though also suggesting that they are considering another round of bond-buying to help the economy further. These conflicting comments triggered erratic moves in the dollar with investors trying to understand exactly where the Fed stands on monetary policy. Most importantly however, the U.S. interest rates will remain unchanged at 0.25% through to late 2014. Data out today includes March home sales and initial jobless claims – neither are expected to indicate any significant gains for the U.S. economy.

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Written by Tom Tong

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