UK GDP Versus FOMC

Yesterday was a relatively quiet day on the markets with just preliminary UK Q2 GDP released, which came out as expected at 0.3 percent for the quarter and 1.7 percent for the year. As a result, the pound made some modest gains over the course of the day, managing to gain half a cent against both the single currency Euro and the US dollar, while EUR/USD traded flat all day ahead of the eagerly anticipated Federal Reserve monetary policy meeting at 7 pm UK time.

The pound was also helped by the BBA mortgage approvals figure which showed 40,000 plus new mortgages were approved last month compared to the expected 39,000 showing the housing market, which has been reported to be a concern over recent weeks, is still showing robust activity. This was in stark contrast to the US figures released later in the day, which showed a dip in applications from May to June of 6.3 percent down to just 0.3 percent last month. New home sales also fell way short of the forecasted figures predicted, helping the pound to sustain its trading range above the key resistance level of 1.3 as traders remained cautious ahead of the FOMC interest rate meeting and policy statement last night.

The Fed meeting came and went and as expected the Fed left interest rates unchanged at 1.25 percent, in what was a unanimous decision. Janet Yellen didn’t hold a press conference this month, so there was no Q&A session, but some key points were made in a press release. They mainly focussed on inflation, noting that overall inflation had declined below 2 percent where they expected it to remain for some time, before stabilising around its 2 percent target level in the medium term. This would indicate that further interest rate hikes are off the cards for now as a hike would likely lead to even lower inflation.

Central Banks use interest rate movements as a way to manipulate inflation. Lower interest rates lead to higher inflation as borrowing is cheaper so more people have more money to spend, economies grow, and inflation increases. The opposite occurs when interest rates rise.

Following the Fed meeting, traders viewed it as dollar negative, as the chances of further rate hikes in the coming months dwindled and sold off the dollar. The pound rose up another half cent, while the euro was the main winner, gaining back the half cent from Sterling and taking nearly a cent from the dollar, reaching fresh multi-month highs.

Onto today and it’s a pretty quiet day for the UK with just a low key trades survey released at 11 am. The EU has some money supply figures to digest beforehand while most of the data comes out after lunch from the States, with jobs data, trade balance and durable goods orders, all sound measures of economic health but of little concern to the Fed who’s main focus is the slowing inflation figure.

With the Fed focus off interest rate hikes investor sentiment will be back behind the euro full steam ahead now so we could be looking at further gains as UK and EU markets digest the news from last night. With that in mind, those out there needing to buy euros in the short term might well be prudent to organise that purchase sooner rather than later, in case the euro rally continues throughout today’s trading session.