The Pound to US Dollar exchange rate (GBP/USD) surged higher by around 0.8 cents yesterday to reach 1.6900 for the first time since July 2009.
The 4.5-year high came in reaction to news that the US economy only grew at an annualised rate of 0.1% during the first quarter. The harsh winter weather brought many areas of the economy to a standstill during January and February and this weighed heavily on economic output.
The disastrous result took markets by surprise; a far more respectable score of 1.2% had been predicted beforehand.
To put things in perspective it is important to consider that British first quarter GDP came in at an annual rate of 3.1% earlier this week. Compared to the 0.025% quarterly growth rate registered in the United States, Britain saw an expansion of 0.8% during the first three months of the year.
The large divergence in Q1 growth scores was seen to reflect the difference in outlook of the two nations’ Central Banks. The Bank of England looks increasingly likely to start hiking interest rates by the beginning of, and quite possibly earlier than, the second quarter of 2015. Whilst policymakers at the Federal Reserve appear reluctant to start tightening monetary policy anytime soon.
This helped Sterling storm its way to a fresh 4.5-year high against the US Dollar yesterday.
During the evening the Federal Reserve announced that it had cut its QE3 asset purchasing programme by a further -$10 billion to $45 billion per month. The decision was largely priced into the market and therefore had a muted impact on GBP to USD trading.
“The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labour market conditions”, said the policy statement.
Although traders see the reduction of stimulus as a step closer to normalising monetary policy, the Fed has repeatedly stated that tapering is not equivalent to tightening. Investors know that it could still be a fairly long time before the US Central Bank raises the benchmark rate above the current record low of 0.25%.
Other data printed fairly positively, with the Chicago PMI jumping from 55.9 to 63.0 and ADP Employment Change beating forecasts of 210,000 by coming in at 220,400.
This bodes well for Friday’s US Non-farm Payroll report, which, if it prints at 210,000 or above, could give the ‘Greenback’ a bit of reprieve following yesterday dreadful GDP reading.
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