The Pound declined against the Euro while remaining relatively unchanged against the Dollar yesterday as speculation over the future monetary policy has continued to be a significant market driver. The currency has rallied just over 3% since the first of the year as the market begins to expect higher rates. This sentiment has however waned in recent days, as current news has led the market to believe the tightening moves might be less aggressive. This week brings GDP today, with expectations being 0.5% for the 4th quarter, a slight decrease from 3Q. If it comes in stronger, it is expected that we will break 1.60 against the US Dollar.
The Dollar declined against the Euro while remaining relatively unchanged against the Pound yesterday. This week could prove to be key in terms of setting the tone for US markets, with the FOMC holding its first policy meeting of the year on Wednesday, and advance Q4 GDP data due for release on Friday. No major changes to the Fed’s stance are expected, despite the fact that the annual rotation of voting members has meant a shift in a more hawkish direction.
The new voters in the FOMC remain sceptical about the benefits of the Fed’s asset purchase program, but they have signalled that they aim to stick with Chairman Bernanke’s plan to buy USD600bn in treasury securities. Improvement in the labour market has continued, albeit at a gradual pace, and despite GDP growth running close to 4% q/q AR in Q4 last year, it will take time for the unemployment rate to normalize in a non-inflationary environment. Besides the FOMC meeting, we will get the first estimate of Q4 GDP growth will be released later in the week, expected at 3.5% q/q AR driven by strong growth in personal spending.
The Euro made gains against the Dollar and the Pound yesterday following signs that the Eurozone economy continues to expand. The single currency rose to highs after strong services and manufacturing Purchasing Manager’s (PMI) reports. The Eurozone Services PMI rose to 55.2 in January, marking 17 months above the 50 threshold denoting expansion while manufacturing PMI eased slightly to 56.9. But more significantly, the input price component of the report surged to a 79.8 from 74.1 previously, the largest increase on record since the report’s inception in 1997. The rise in input prices lent support to ECB President Trichet’s warning over mounting inflation in the region which has eased. The euro should remain supported in the near term as price pressures and the ECB’s potential monetary policy response overshadow worries over the fiscal health of member countries.
Data released 25.01.2011
UK 09.30 Prelim GDP (Q4)
UK 09.30 PS Net Borrowing (December)
US 14.00 Case Shiller House Prices (November)
US 15.00 Consumer Confidence (January)