With little hope of US politicians reaching a deal on the latest set of spending cuts, and fourth quarter US GDP data failing to impress, the Pound managed to benefit against the risk-related currencies. Sterling is currently better off against the Euro, the Canadian Dollar, the Australian Dollar, and the New Zealand Dollar.
Softer-than-expected Eurozone inflation figures also contributed to the fall in risk sentiment, which saw the Pound to New Zealand Dollar exchange rate rise by 1.5 cents to 1.8380.
Although Sterling is still trading at depressed levels against all of its major currency peers in reaction to Moody’s decision to downgrade Britain’s AAA credit rating, the Pound proved yesterday that it still has the ability to attract traders during times of economic uncertainty.
The UK currency is suffering from a crisis of confidence as: Bank of England intervention – most likely in the form of further quantitative easing measures – appears more likely than ever; the UK budget deficit is continuing to narrow at an unacceptably slow pace; and soft domestic data is fuelling fears that Britain may slip into an unprecedented triple-dip recession this quarter.
However, it has emerged this week that the global economy has a fairly comprehensive set of problems of its own: Italian elections have proved fruitless at providing the Eurozone’s third largest economy with a stable government; Core inflation in the 17-nation bloc has shrunk to a worryingly low 1.3%; US domestic growth has failed to impress, coming in at a measly 0.1% when 0.5% had been hoped for; and political quarrels between US leaders are making it practically impossible for a deal to be struck to avert the latest set of spending cuts.
The IMF weighed in on the spending cut / sequestration fiasco by warning that global projections may be revised lower if the situation in the US is not sorted out by Friday night when the cuts are set to be automatically triggered:
“We will see what happens in the US on Friday, but everybody is assuming that sequestration is going to take effect. What it means is that we are going to have to re-evaluate our growth forecasts for the United States and other forecasts”.
EUR/USD declined by around -0.7 cents yesterday as markets flocked towards the safe haven US Dollar as a precaution against any further economic shocks.
The appreciative Pound also came into demand as Sterling benefited from defensive inflows from around the world. GBP/EUR grew by 0.7 cents, GBP/CAD rallied by 1.1 cents, and GBP/AUD increased by 0.8 cents.
Risk assets were dealt another blow earlier this morning when Chinese Manufacturing Output printed softer-than-expected at 51.4, compared to predictions of a more impressive score of 50.5.
Later on this morning the UK Manufacturing PMI for February will be released, the print is expected to come in at 51.0, but any score below this could remind markets of the UK’s triple-dip recession fears and could halt Sterling’s recent rallies. Later on in the day the Canadian Dollar will be susceptible to further declines if it is announced that the Canadian economy failed to expand during December.
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