The Pound declined against the Euro and the Dollar as data showed that the British economy shrank by more than previously expected in the fourth quarter. Markets were taken by surprise in January when the initial reading of 2010 Q4 GDP showed that the UK economy shrunk by 0.5%, and most investors wrote off the number as heavily skewed by inclement weather. However, this fridays’s revisal of the number to an even worse -0.6% has investors paring bets that the BoE will have room to tighten monetary policy. BoE Governor Mervyn King’s stance that expectations for higher rates are overblown appears to be valid, and will likely see the pound test the lower end of its ranges in the near term.
The Dollar made gains against the Euro and the Pound as the frenetic oil trading begins to calm. While the political situation in North Africa and the Middle East is far from settled, it appears that the recent protests in Libya have done little to slow global oil production. Equities are also in the black this morning for the first time in nearly a week as investors’ risk appetite returns, albeit slowly. Economic data in the US also sent mixed signals with 2010 Q4 GDP growth being revised down to 2.8% from 3.2% as state and local governments reigned in spending. However, excluding inventories, the economy grew at a 6.7% pace, the most since 1998, and on an annualized basis, the world’s largest economy grew 2.8%, the most in five years. A separate report showed that consumer confidence continues to post gains, beating forecasts with a reading of 77.5 versus the anticipated 75.5.
The Euro made gains against the Pound while declining against the Dollar as oil prices begin to moderate. Focus has once again shifted towards the Eurozone’s unresolved debt crisis as fears recede that unrest in Libya would impede global oil production. Impeding elections in Ireland have markets worrying that the second recipient of joint EU-IMF “bailout” funds will look to renegotiate their massive loans. However, rising inflation throughout the region will provide significant support for the common currency. A day after German inflation registered above expectations, a report showed that Belgian prices quickened to the fastest pace in more than two years. Mounting price pressures throughout the region have underpinned expectations that the ECB will hike rates before the Fed, which would boost the euro’s yield advantage.
Data released 28.02.2011
EU 10.00 Final HICP (January)
US 13.30 Personal Income / Consumption (January)
Core PCE (January)
US 14.45 Chicago PMI (February)
US 15.00 Pending Home Sales (January)