Brutal weather in Q1 bites US GDP - US dollar index at 1 month low

Claire Hogarth26/Jun/2014Currency Updates

GBP

London closed with sterling tipping up against the greenback, taking leverage from the poor US GDP and durable goods figures. Sterling slipped a little against the euro but overall it was minor. Yesterday across the board was fairly flat for sterling. The FTSE also continued the downward trend for the week. Carney will again hit the cameras today as he delivers his financially stability report; with the recent explosion in the property market getting some hot under the collar, the Governor is expected to touch upon his thoughts on the whispers of a potential property bubble.

Sterling will again be sitting on the side-lines today as the market will mostly be focused on US jobless claims and French employment data. Key play for sterling this week will be GDP set for release Friday morning, one would assume we continue to trade range bound prior to this.

EUR

After a sloppy start to the week, London closed with the euro up against sterling and the dollar and pretty much across the board. This was in stark contrast to the start of the week, which kicked off with of a pincer of dipping German business confidence and a wider slowdown in the ever struggling French economy. The resulting figures saw PMI for the services and manufacturing sector hit the lowest level seen so far this year.

Yesterday therefore was pleasing for the Eurozone and euro, leverage was taken from the poor US data with the euro upper cutting hard against the greenback. There has been chatter in the market over a very large option structure at 1.3500; if true it could cause the market to test the downside.

Right now Eurozone banks also seem to be in better shape – financial markets have stopped demanding a premium to insure European banks debts against the risk of default, the latest indicator that the sector is recovering from the crisis. The Eurozone bond market is also experiencing plenty of demand.

Data of note today includes French employment figures set for release this morning.

USD

The snowman snaring US growth remains yet to fully melt. Those still shivering will remember the savage weather that swept through the East and West Coast at the beginning of the year, the weather was the worst seen in 20 years, temporarily crippling the economy.

Yesterday’s revised GDP figures for Q1 confirmed this coming in below expectations at -2.9%, the steepest decline since before the financial crisis. The street had called a pullback of around 1% so clearly the slowdown was worse than expected.

Naturally we saw the dollar dip across the board with the USD index hitting its lowest levels in 4 weeks.

The short term reversal of US growth leaves Yellen with less room to flex on the central bank’s support for the economy. Right now Yellen has little choice but to continue QE at the current pace. The past 5 months on the bounce have seen the Fed cut its QE program by $10B per month bringing the total figure to $35B per month. For the meantime this looks set to continue. The Fed response to the data was fairly standard with them pointing to more recent data that shows fresh improvement in the economy.

Focus will again swing on the US today with the release of initial and continual jobless claims and consumer spending – claims are expected fairly flat with consumer spending to the upside as sentiment improves, as ever this should give some rough insight into the likely NFP figure. Jobless claims set for release at 1.30 BST.

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Written by Claire Hogarth

Marketing Executive at Ebury. English Literature graduate from the University of York and a motivated professional.