Foreign Exchange News
30 May 2014

Bitter Sweet for US

EUR/USD             1.3610
GBP/USD             1.6745
GBP/EUR             1.2301 (0.8128)
EUR/CHF             1.2210
GBP/CHF             1.5021
GBP/AUD             1.7976

 

US Gross Domestic product fell at a 1 percent annualized rate, worse than expected revised Commerce Department figures showed yesterday. It is not all doom and gloom however, much of the decline was due to less inventory building that many economists say won’t last. As a result many economists are boosting second-quarter growth forecasts and suggesting we should see a big rebound. Stockpiles grew less than half the pace than in the final three months of 2013, looping 1.6 percentage points off GDP while businesses cut back on investment. However demand did pick up entering into the second quarter, giving weight to the Federal Reserve’s view that the economy is recovering. Richmond Federal Reserve President Jeffrey Lacker said yesterday’s results were unsurprising given the data flow we have seen to date. Lacker pointed out that it’s not all bad weather as to the reason for the contraction. He pointed out a drop in inventories, a rise in imports and a fall-off in defence spending would all have contributed to the contraction. He does however remain confident of a gradual move back to 2.5% later this year.

 

Improving momentum of the US economy was also further supported by the latest initial claims data.  Jobless claims fell by 27,000 to 300,000 in the week ended May 24 pushing the more reliable 4-week moving average to its lowest since 2007. Fewer dismissals may be a sign that companies, already lean from recession-era job cutting, are gearing up for improving demand as the economy shows signs of rebounding from a first-quarter slump.

 

Last up yesterday was Pending Sales of U.S. Existing Homes increased 0.4%. Contracts to purchase previously owned homes rose for a second month in April, a sign that the residential real estate market is stabilising after a weak start to the year. Housing demand has cooled as higher prices and borrowing costs put ownership out of the reach for some prospective buyers. While mortgage rates have been falling in recent weeks, an improving employment outlook and easier access to credit would provide an additional push for the industry.

 

Data remains light today and all eyes will be on next week’s ECB rate decision, traders will be keeping an eye on the build up to this announcement on June 5th. Mario Draghi will have to decide whether low inflation and mediocre growth warrant an interest-rate cut, asset purchase or more liquidity measures.

 

Thursday saw a new 1 month low for GBP/USD of 1.6697. GBP/USD continued to trade lower close to the low in an over-night which saw it trading in an overnight range or 1.6714 – 1.6738. EUR/USD entered into a 3 month low of 1.35882. GBP/EUR was fairly stagnant as much of Europe’s main partners enjoyed a bank holiday.

 

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