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27 Jun 2014
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27 June 2014 (Currency Solutions)

UK GDP Growth Accelerates Less than Expected

Data just out has confirmed that the UK economic growth was revised downwards during the first quarter. However, it still continues to grow at a healthier pace, indicating that the recovery is on track and has raised expectations for a rate hike. Although, the UK housing market appeared to be a potential threat for the recovery, measures adopted by the central bank yesterday to cool the housing market has subsided this fear. However, further clarity over the pace of revival in the growth during second quarter will be clearer in the coming week with the release of UK PMI reports.

Across the Euro zone, with today’s weak Spanish inflation numbers, today’s German inflation data will gain increased market attention along with Euro zone sentiment indices. In the US, after a Fed official offered a hawkish tone, thereby heightened expectations that interest rate hikes might come as early as first quarter of 2015.

Pound Sterling – UK Markets

The Pound has shown little reaction following data just out which indicated that the UK economic growth revised down for the first quarter, although the pace of recovery continues to remain robust. Furthermore, a rise in the UK GfK consumer confidence, the first positive reading since March 2005, reinforced signs of steady recovery in the nation. Additionally, current account deficit narrowed during the first quarter, although less than expected. Going ahead today, various economic sentiment surveys in the Euro zone and German inflation data will provide further direction to Sterling.

Meanwhile, the BoE’s Financial Stability Report released yesterday imposed tighter mortgage-lending rules in the UK. While the central bank opined that household indebtedness does not pose an imminent threat to the nation’s stability, it justified the measures as necessary to contain overheating in the UK property market. In his comments in the press conference post the release of the report, the BoE Chief, Mark Carney, stated that the central bank expects the momentum in the housing market to continue for the next year or so.

US Dollar – US Markets

The greenback lost ground against the Pound in yesterday’s trading session amid dismal economic data. Losses in the US Dollar were capped by a hawkish tone in speeches from key Fed officials. Jeffrey Lacker, the Richmond Fed President, and James Bullard, the St. Louis’s Fed President, opined that inflation in the US would be firmer this year. The latter also forecast that the first interest-rate hike would happen in the first quarter of next year and that the unemployment rate is on track to fall below 6%. In economic data, first time unemployment beneficiaries in the US rose for the last week, which continued to raise concern towards the nation’s wobbly job market recovery. Meanwhile, US personal income advanced less than expected in May

Meanwhile, the greenback is trading in a tight range against its major counterparts this morning. With no major economic releases in the US apart from the final Reuters/Michigan consumer confidence report, investors in the Euro-US Dollar pair will also keep a tab on German inflation data which is likely to show a modest improvement for June. Investors will keep a close watch on next week’s string of domestic macro releases, especially labour market reports to gauge the pace of recovery in the sector during the second quarter.

Euro – European Markets

The common currency is trading in a tight range, albeit on a firmer footing against the greenback this morning. Final French economic growth for the first quarter came in below its preliminary estimate. It remains to be seen whether the French government will cut down on its 1% growth forecast for the year. Earlier this week, the national statistics bureau Insee forecast a growth of 0.7% this year for Europe’s second largest economy. Meanwhile, markets keenly await the preliminary German inflation reading and the final Euro zone consumer confidence which is anticipated to improve for June on the back of the recent easing measures by the ECB. Traders will also eye cues from the two day meeting of EU heads of state, where the new President of the European Commission is expected to be confirmed.

Going ahead, next week, major Euro zone indicators including the final GDP numbers for the first quarter are scheduled to be released. The ECB meeting next Thursday will be eyed for cues on any asset purchase programme, amid the recent dovish comments by various ECB officials.

Other Currencies – Highlights

The Japanese Yen is trading on a firmer footing against the greenback this morning following upbeat domestic economic reports. Data released earlier today indicated that on an annual basis, inflation in Japan climbed at a fastest pace in 32 years for May, on the back of the effect of the sales tax hike while the unemployment rate dropped unexpectedly last month. Furthermore, annual retail sales in the nation showed a less than anticipated decline for May. A combination of better than expected retail sales and unemployment coupled with the highest rate of price growth since 1982 painted a picture of a successful monetary policy mix from the Japanese Prime Minister, Shinzo Abe.

With no major economic releases from Japan and US today, apart from US Reuters/Michigan consumer confidence report, investors will remain on the sidelines ahead of next week’s crucial domestic and the US macroeconomic reports for further direction to risk appetite.