The Pound to US Dollar exchange rate (GBP/USD) recovered slightly from its daily low of 1.5127 yesterday as the Federal Open Market Committee struck a slightly more dovish tone during its July meeting than expected. Fed Chairman Ben Bernanke maintained the outlook from his most recent statements: that asset purchases will remain at the current pace of $85 billion per month until significant improvements in the US economy are witnessed, but policymakers voiced concerns regarding the outlook for inflation and this was interpreted as negative for the US Dollar.
The US Dollar rallied by around a cent against Sterling during the afternoon as American GDP printed above analysts’ expectations in the second quarter. Smashing forecasts of 1.0%, annualised US Q2 GDP came in at 1.7%, which bolstered demand for the ‘Greenback’.
The good news continued with the report also featuring a gigantic upward revision to historical Gross Domestic Product: 2012 output was upgraded from 2.2% to 2.8% and the entire US economy was reported to be 3.6%, $559.8 billion, larger than previously estimated. The mammoth GDP revisions mean that the post-crisis ‘great recession’ was not as deep as initially calculated, that the public sector deficit as a percentage of GDP is not as wide, and that the savings ratio is slightly higher.
US ADP Employment Change also printed positively at 200,000, beating predictions of 180,000, which helped the stampeding ‘Greenback’ push GBP/USD down to a fortnightly low.
However, Sterling clawed back some ground during the evening during the FOMC policy statement. Whilst the talk was taking place GBP/USD stormed higher to a daily high of 1.5254, before consolidating for the day close to 1.5180.
Fed Chairman Ben Bernanke struck a largely negative tone during the announcement, which kept markets guessing as to when asset purchases will be slowed. Bernanke was slightly clearer regarding the benchmark interest rate, insisting that it will remain at 0.25% at least until the Unemployment Rate falls below 6.5% and possibly for longer. In terms of QE3 taper speculation, markets interpreted three things to suggest that the slowdown may not start in September – which was the prevailing view coming into the FOMC statement.
Firstly, the US economic recovery was described as “modest” this time out, downgraded from “moderate” in previous statements. Secondly, the Fed mentioned that mortgage rates have recently risen – which ironically is a result of taper speculation as US Treasury yields rise in value. And thirdly, it was reported that several members of the Committee had voiced concerns regarding the pace of inflation, which has remained consistently below the 2.0% target for some time.
Later on today the Bank of England is expected to maintain its current benchmark interest rate of 0.50% and refrain from modifying the current asset purchasing target of £375 billion. If the UK Central Bank sticks to the script then GBP/USD is likely strengthen slightly. However, if the BoE elects to shake things up a bit with another round of quantitative easing to get the UK economy growing faster then demand for Sterling is likely to plummet and GBP/USD could slide towards significant psychological resistance at 1.5000.
US Manufacturing and Jobless Claims data is due out this afternoon, but tomorrow’s crucial Non-farm Payroll report will yield the most market influence as traders adjust their bets for QE3 tapering in response to the strength or weakness of the reading.
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