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Daily News from Senior FX Analyst – Samuel Allen

Best German growth figures since the fall of the Berlin Wall.

– German growth rises by 2.2% against 1.3% predicted.
– Sterling bounces on more positive picture
– Euro finds support
– Safe haven currencies lose some of their luster
– Oil prices rise in overnight trade benefitting commodity currencies

German GDP figures this morning show that the German economy grew by 2.2% during the first quarter of this year which is the fastest quarterly growth in more than 20 years.
The National statistics office stated that “Such quarter-on-quarter growth has never been recorded before in reunified Germany.” The weak Euro has encouraged exports as the rest of the world go bargain hunting for cheaper luxury goods and cars.
Such positive data should’ve ordinarily supported the Euro a good deal but investors are still cautious, as ING’s Chris Turner states “While the threat of a peripheral (European Union) debt crisis has receded, we would still prefer to hold Swiss francs over Euros,”

The figures from the Euro-zone have revived risk sentiment and acted to support sterling against most of the majors. “Risk appetite is driving sterling up against the dollar on the day after decent German GDP, but this week’s dovish inflation report from the Bank of England should restrict gains,” said Melinda Burgess of RBS. The pound fell 1.4 percent against the dollar on Wednesday as the Bank of England cut its growth forecasts and predicted inflation would stay below target over the medium term, leaving the door open for more quantitative easing.

The Pound has managed to hold its own very well against the Euro and the rising trend support has held after last Tuesdays low, this signals that the uptrend which has driven the cross since the October 2009 low is still intact and could drive them above resistance at 1.2223 GBP/EUR followed by the 1.2400 GBP/EUR June 29th high, “Euro/sterling is being driven by sovereign risk problems in the euro zone which haven’t gone away,” said Burgess at RBS.

U.S. crude for September delivery has risen over $1 after a 7 percent tumble in the past three days that took prices to their lowest since July 19. This has helped to buoy the commodity currencies (Canadian dollar, South African Rand, Australian dollar) Germany’s growth might help to support oil prices but its American growth which really adds to demand and with their economic growth still forecast to be relatively low. Oil traders aren’t expecting any great leap in demand any time soon, another deterioration in prices could be forthcoming.

Looking forward to this afternoon retail sales figures from the U.S. might add to speculation that the economy is still in a contraction phase coupled with the CPI inflation data which could also colour a darker picture for the American economy as they sink closer and closer to deflation. These two factors alone might push traders back into their safe dollar assets and could drop the pound dollar rate back down to trend support.