US GDP growth validates Fed taper decision, dollar gains.

Tom Tong31/Jan/2014Currency Updates

GBP

Yesterday was a more reactionary than proactionary session for the pound. With little data out of the UK, sterling moved in response to other worldwide news, trading in opposite directions against the euro and the dollar.

Early morning losses saw the pound dropping off against the greenback to 0.6% below yesterday’s peak. A brief rally was stymied by the pleasing US GDP data, and by the end of the day the rate was half a cent below yesterday.

A couple of bad days will not deter bullish sterling buyers, who see through the apparent sterling weakness as an unavoidable consequence of dollar strength.

Better fortunes were to be had on the continent, as the pound fared well against the euro for most of play. A relatively consistent rise throughout the day was down to a string of disappointing data from the EU, lending upward support to the pound for nearly 0.7%.

Interest in the pound has dropped off in the latter parts of the week after a strong start, with markets having to focus their efforts on other parts of the globe – particularly emerging markets. Once again there is little or no data of interest from the UK today.

EUR

It was another poor day for the eurozone, with a multitude of disappointing data feeding the euro bears and putting downward pressure on the currency. Measures of business climate, economic sentiment and industrial confidence all came in below expectations, but the most worrying news, and perhaps the most shocking, was the even mighty Germany is not immune to low inflation, with its year on year January figure falling 0.2% to 1.3%. Prices actually fell in January compared with a month ago, losing 0.4% on December’s reading. This is particularly bad news for a country that relies so heavily on its strong domestic demand base for growth.

Better German employment data, a drop in the overall rate to 6.8%, wasn’t enough to halt the euro’s slide, as the single currency suffered heavily against its major partners. The euro recorded losses of 0.8% against the dollar during the day, while the trend continued overnight. Poor retail sales this morning for Germany won’t help the euro’s situation either.

An important day for the eurozone today as EU wide inflation figures are released. Investors will be hoping for a glimmer of hope in the shape of higher inflation; any movement above expectation will generate buying interest, whilst a weak result will see the euro lose yet more ground.

USD

With some questions over the prudence of tapering in the midst of emerging market turmoil and poor Non-Farm Payroll results, the Fed would have been relieved to see US GDP reach 3.2% YoY for Q4. The pleasing figure came in despite the effect of a government shutdown in October and the severe December weather. One of the biggest drivers of growth was US exports, which jumped a mighty 11.4%, although this effect is likely to be reduced going in to 2014 due to the falling demand out of emerging economies, as well as an ever strengthening currency.

The dollar was in fine form yesterday, blazing over a limp euro for a good half cent. It found a little more resistance in the pound but triumphed in the end, pushing back up towards levels not seen since last week.

Continuing jobless claims fell 29 thousand last week, good news for US consumers and good news also for dollar cheerleaders. The US has bounced back very strongly in the weeks after poor December non farm payrolls, and if the trend continues and culminates in a bullish Non-Farm Payroll next month, then surely no one will be betting against the greenback to continue its rise unabashed for the foreseeable future.

A range of data out of the US today, including a Chicago PMI, Michigan consumer sentiment, personal income and personal consumption measures.

On a special note, we say good bye and farewell to the outgoing chairman of the United States Federal Reserve, Ben Bernanke. His eight year reign oversaw the worst recession since 1929, record unemployment and huge international economic pressures. The US, in part thanks to the efforts of Mr Bernanke, was the first developed country out of recession, and continues to lead the charge on recovery. Unemployment is back under 7% whilst growth topped 3% last year. His successor, Janet Yellen, is charged with overseeing the tapering of QE and continuing to support the US recovery.

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Written by Tom Tong

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