The Pound made gains against the Dollar while declining against the Euro following disappointing GDP data. The preliminary reading of Q2 British GDP was short of expectations, expanding by only 0.7% on an annualized basis, less than the 0.8% expected and down from 1.6% in the previous quarter. With the domestic economy stalling, the British recovery has become increasingly dependent on external demand. Unfortunately, with global trade growth having lost momentum in the first half of the year, the British economy will struggle to rebound after three quarters of essentially stagnant growth. The GBP will struggle to find support against most of its major peers on the weak outlook. Nevertheless, the debt struggle in the US is trumping all other major economic data this morning, and the demand for alternatives to the USD will keep the pound supported in the near term.
The Dollar declined against the Euro and the Pound as politicians struggle to reach an agreement on raising the debt ceiling and reducing the deficit. Speaker of the House Boehner and President Obama both appeared on national television yesterday evening, highlighting the distance between the two political camps, and just how far away we are from a so-called “grand bargain.” As such, investors have exited long dollar positions en masse as the August 2nd debt limit deadline fast approaches. Congress’ approval rating has plunged to a new all-time low with a mere 6% of Americans polled believing that Congress is doing an adequate job. Meanwhile, mixed economic data has also weighed on the dollar as not only does the US face serious fiscal challenges, but it is also struggling to grow economically. Consumer confidence did unexpectedly gain in June, registering 59.5 over the previous month’s 57.6, but a gauge of manufacturing activity in the Mid-Atlantic region and new home sales both declined. The data will have little impact on the USD in the near term, but assuming that a deal to raise the debt ceiling is reached, the outlook for medium to long term Fed monetary policy will shift into focus. In the near term, with investors beginning to price in the potential effects of a limited stop-gap deal at the least and a complete debt default at the worst, the dollar will remain under immense pressure against its major counterparts.
The Euro made gains against the Dollar and the Pound supported as the primary USD alternative and by increasingly hawkish posturing from ECB members. After Greece’s debt struggles fell out of the spotlight with Eurozone officials agreeing on a second “bailout” package, investors have turned their attention to the US debt ceiling. Moody’s downgraded Greek debt yet again, noting that private participation in the second Greek bailout still may constitute a default, but the move went largely unnoticed as investors focus on the US.
Meanwhile, ECB member Noyer told reporters this morning that the Bank remains in a period of “strong vigilance,” the catch phrase often used by ECB President Trichet to signal a forthcoming hike in interest rates. This may suggest that the Bank will raise rates as soon as at their meeting next week, but it is unusual for a member to use the phrase before Trichet possibly signaling discord amongst the central policymakers.
Data released 28.07.2011
EU 10.00 EC Business Climate Index (July)
EU 10.00 EC Economic Sentiment (July)
Industrial / Services / Consumer
UK 11.00 CBI Distributive Trades Survey (July) -
UK 11.00 Land Registry House Prices (June)
US 13.30 Initial Jobless Claims (w/e 23rd July)
US 15.00 Pending Home Sales (June)