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The Pound made gains against the Dollar while remaining relatively unchanged against the Euro yesterday. The Pound has been helped higher against the dollar after the Fed’s dovish statements, but it remains under pressure against most of its other counterparts on the continued flow of disappointing British economic data. UK retail sales slid this month at the fastest pace in nearly three years after a report earlier this week showed that the British economy in fact contracted in Q4 2011, raising the odds of another recession.
However, while the BoE is widely expected to introduce a fresh round of quantitative easing in February, the Fed’s ultra-dovish stance makes their anticipated actions look comparably restrained.
The Dollar declined against the Pound and the Euro following a pledge from the Fed to keep interest rates exceptionally low until 2014. With US assets yielding all but nothing for at least the next two to three years, investors are seeking higher returns elsewhere. Further weighing on the dollar, Fed Chairman Bernanke paved the way for a third round of large-scale bond buying should unemployment remain at or near its current 8.5% and inflationary pressures continue to ease. While global economic growth continues to fall short of expectations, US data has generally surprised to the upside, leaving investors questioning the Fed’s dovish stance.
Durable goods orders fell to 3% in December, down from 4.3% in the previous month, but much better than the 2% expected. Weekly jobless claims ticked slightly higher to 377k versus last week’s 356k, but the measure remains well entrenched below the key 400K barrier. Leading indicators also fell short of expectations at 0.4%, but were higher than last month’s downwardly revised reading of 0.2%.
Investors will pay particularly close attention to GDP data due today, fearing that the Fed announcement must mean that they are positioning for a shortfall the market has not anticipated. While the Fed’s lax monetary policy will weigh on the dollar in the short term, the general outperformance of the US economy will provide support in the longer term.
The Euro made gains against the Pound while remaining relatively unchanged against the Pound as European policymakers inch closer to brokering a deal to provide Greece with further financial aid. It appears that European officials understand the severity of the situation should action not be taken, and while a deal is ultimately expected, investors are remaining largely on hold until a final deal is brokered.
EU Finance Minister, Jean-Claude Junker told reporters this morning that “there’s no default without contagion. It is in everyone’s interest to avoid a Greek default.” However, avoiding the spread of contagion is only half the battle as all estimates point to a mild recession in Europe in 2012. Nevertheless, the common currency is finding support this morning, albeit within its recent ranges.
Data released 27th January 2012
EU 09.00 M3 (December)
3 Month Moving Average
US 13.30 Advance GDP (Q4)
US 14.55 Final Michigan Sentiment (January)
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