The US dollar fell sharply after a weaker-than-forecast US GDP release. The US currency plunged to a two-month low against sterling, with better-than-expected first quarter growth data from Britain a result that most investors were surprised to hear, and one that is likely to keep the Bank of England’s quantitative easing programme on hold in the near-term.
The promise of ongoing monetary easing from the Bank of Japan last week was unable to convince investors to ramp up selling of the yen which continued to stay on the right side of recent lows. Instead, the yen is holding firm coming into this week, supported by safety demand from investors troubled by both US and eurozone economic data. A shrinking eurozone economy is beginning to take its toll on the euro and trading of the single currency is expected to gather pace ahead of the European Central Bank policy decision on Thursday.
The British economy over-performed in the first quarter, an unexpected surprise from last week’s GDP data that sent the pound sprinting to two-month and three-month highs against the US dollar and euro respectively. It also reached 10-week highs on a trade-weighted basis as investors reacted positively to the news; a broad move that should keep the pound supported before markets examine Britain’s latest PMI surveys this week.
US Dollar
The US dollar ended in the red across the board after weaker-than-expected US GDP data suggested the Federal Reserve will keep pumping money into the economy for some time yet, while upcoming data releases are also likely to bolster bets the Fed will hold its stimulus plan in top gear.
The greenback dropped last week to its weakest since February 19 against sterling after an advanced report showed the US economy grew at an annualised pace of 2.5 per cent in the first quarter, missing estimates of three per cent expansion.
Euro
Growing evidence that Europe’s core economies are coming under greater stress, probably keeping the euro region in recession for longer this year, could force the European Central Bank to cut interest rates or at least provide some form of monetary stimulus.
The ECB will deliver its monetary policy decision on Thursday and most analysts are expecting to see its key borrowing rate slashed to 0.5 per cent. On the surface this would be negative for the euro, however, if markets sense that stimulus will lead to a faster economic recovery, it may just help limit the currency’s probable fall.