US GDP shock

31 January, 2013

Matthew Boyle

It is the first time a contraction has been seen since 2009, and interestingly off the back of 3.1% growth in the 3rd quarter. This shrink in the 4th quarter was a huge surprise, with most analysts predicting growth of around 1% despite the obvious dominance of the “fiscal cliff” issues in Q4. This result will now heap a huge deal of pressure on the Federal reserve to stimulate the economy once again, which may prove difficult with their ongoing bond buying scheme and also following an announcement by the Fed of a 22% cut in defense spending. This combined with poor GDP figures instantly knocked 2.6% off their overall growth figure and in the currency markets saw the dollar weaken against the majors – perhaps much welcomed by the currently flagging pound.

News in Europe yesterday was similar with Spain announcing a contraction of 0.7% down from Q3 in Q4 – the worst since 2009. Despite this it would certainly seem that the ECB banking rules introduced last year have boosted confidence in the single currency as the sentiment is euro-positive. The feeling is now that with ECB support the markets have been somewhat tamed and long term economic stability and growth are back on the cards. This combined with bullish announcements from the UK of an increase in House prices- both YoY and MoM up 0.3% saw the pound strengthen against the single currency by around half a cent – welcomed by many following losses of around 5% already this year.

The major data release of the day is European Consumer Price Index which is predicted to show a minor contraction. However it would seem that the Euro has recently built up a head of steam in particular against the pound, so it is unlikely that even a largely negative result will cause major swings or pound strengthening. Much of the focus this week will remain on the US as tomorrow sees Non-farm payrolls, unemployment, and Purchasing Managers index released. Following yesterdays shock GDP announcement all eyes will be focused on the US and any indicators as to their economic recovery. Poor results here may be welcomed in the UK which has recently lost its safe-haven status to investors, however Dollar weakness can often result in Euro strength so it will be an interesting few days for the pound as the majors continue to battle each other.

If you have any upcoming transfers make sure you speak to your Currency Index broker to make sure you stay ahead of the markets.