Britain’s surprise first quarter GDP result sent the pound sharply higher, with the most obvious outcome in currencies its jump to two-month highs against the US dollar, as investors worry that the comparable US growth figures will encourage the Federal Reserve to keep pushing policy in the opposite direction, and maintain its $85 billion-a-month stimulus plan.
The Bank of Japan reaffirmed its aggressive monetary easing position, but the yen gained after the central bank also upgraded its economic growth and inflation forecasts. The yen may continue to rebound from the record lows that it had fallen to earlier this month as investors take cover from key updates in the coming days that are likely to push and pull investors in many directions.
Sterling
Investors poured back into the pound after Britain’s first quarter GDP beat market expectations and put an end to fears of a triple-dip economic recession, sending sterling shooting higher to two-month highs. The pound also jumped to 10-week highs on a trade-weighted basis, with news of the UK economy outperforming forecasts, not something markets had expected to hear. The economy grew by a more-than-expected 0.3 per cent in the first three months of this year, a result that points towards the Bank of England making no changes to its quantitative easing programme in the months ahead.
US dollar
The US dollar appears to be looking somewhat vulnerable ahead of the US first quarter GDP data despite fairly solid forecasts, suggesting that investors don’t expect the data to signal a return to full employment; a missing signal that should see the Federal Reserve maintain its pledge to press ahead with monetary easing at its policy meeting next week. The US dollar lost ground against the yen and tumbled to a two-month low against the British pound yesterday.
Euro
Better-than-expected UK growth data pushed the euro to three-week lows against the pound, with the single currency seemingly lacking the fundamentals to fight back in front of next week’s European Central Bank meeting in which President Mario Draghi may respond to recession in the eurozone with looser monetary policy. However, the euro apparently found support from expectations of an ECB rate cut, a move perhaps seen as overdue and one that should encourage business activity. For now, the spotlight is on the US economy and the release of first-quarter GDP. With the US dollar looking a little uneasy, investors may decide to hold on to their euros.