Yesterday evening (14:20 PM ET local time) two large explosions struck the finish line of the Boston Marathon. At least two people were killed and over 120 were seriously injured. White House officials labeled the attack an “act of terrorism”, but President Obama warned people not to jump to conclusions stating that he doesn’t “know who did this or why”.
The tragedy unsettled markets and fuelled, already prevalent, risk-aversion trends. The Pound to US Dollar exchange rate (GBP/USD) shrunk by -0.35 cents in the immediate aftermath of the Boston bombings, striking a daily low of 1.5270. Although Sterling lost out to the ‘Greenback’ – the world’s go-to reserve currency – the Pound improved by around 0.3 cents against the New Zealand Dollar (GBP/NZD) as jittery investors turned their backs on the ‘Kiwi’.
Even before the attack investors’ appetite for risk had been depressed by soft financial data from China and the United States – the world’s two largest economies.
The Chinese economy was forecast to expand by 8.0% during the first quarter, but the actual result showed a slightly jaded improvement of 7.7%. Declines in government spending, a lower rate of CPI inflation, steeper luxury taxes, and slowing disposable income growth, all contributed to the soft GDP report. Chinese Industrial Production also missed the mark at 8.9%, compared to predictions of 10.1%. The decidedly disappointing dataset caught markets off-guard and sent riskier assets spiraling lower, as markets flocked to the traditional safe havens of the US Dollar and the Japanese Yen.
The only potential upside of the surprisingly subdued Chinese ecostats is that it could persuade the People’s Bank of China to embark on a new round of monetary easing in order to boost growth. However, until this scenario plays out, the data will continue to be interpreted negatively for the global economy.
Risk sentiment was damaged further by a string of weak economic releases in the US: The New York Federal Reserve ‘Empire State’ Manufacturing index slid by more-than-expected from 9.2 to 3.1 in April, and the National Association of Home Builders/Wells Fargo index fell from 44 to 42.
Before the tragic bomb explosions in Boston, the Pound was -0.4 cents down against the US Dollar (GBP/USD) as risk aversion flows benefitted the ‘Buck’. However, Sterling was broadly stronger across the board against the commodity currencies: the Pound was around 2.1 cents higher against the New Zealand Dollar at 1.1810 (GBP/NZD), 1.6 cents better-off against the Australian Dollar at 1.4765 (GBP/AUD), and 0.8 cents stronger against the Canadian Dollar at 1.5650 (GBP/CAD).
Although investors were spooked by the devastating events in Boston, markets remained relatively calm following the initial outburst of panicky trading. As the story behind the attack unravels traders will keep a close eye on developments to gauge whether the disaster will remain an isolated incident or lead to tougher reverberations. Any further terrorist outbreaks could lead to a protracted period of depressed risk sentiment, because the ensuing instability would likely conjure an image of economic uncertainty.
Later on today headline inflation figures for the UK, Eurozone, and US, will most likely show British CPI remain well above-target at 2.8%, whilst inflation in the 17-nation is expected to hold steady below-target at 1.7%, and the US figure is predicted to fall from 2.0% to 1.6%. Under this scenario Sterling would stand to benefit the most; further quantitative easing from the Bank of England would appear unlikely, but ECB and Fed stimulus bets would increase.
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