The Double Dip Dilemma

Yesterday’s FOMC meeting drew most of the market attention with the high yield currencies gaining after the Federal Reserve indicated that it will maintain exceptionally low interest rates until at least late 2014. This announcement overshadowed the lower-than-expected UK GDP data released yesterday. With little on offer in terms of economic releases in Europe today, markets will focus on the outcome of Italian bond auctions. Market participants will also keep an eye on news flow from Greece where the debt swap negotiations are scheduled to resume today.

Pound Sterling – UK Markets

The Pound has continued its upward momentum against the US Dollar this morning and is close to the 1.5700 mark. Sterling showed resilience against the Euro in early morning trade but has since returned its gains. Yesterday’s GDP numbers have triggered market concerns that the British economy is heading for its first double-dip recession since 1975. Meanwhile, the BoE minutes for the latest monetary policy meeting, released yesterday, indicated that the policy makers remained split over further stimulation to the economy in the near future. Moreover, despite the dismal GDP data, the Chancellor, George Osborne, insisted that the government will not abandon its austerity plans, stating that the economic contraction was on account “of what’s happening in the world and specifically the Eurozone”. We expect Sterling to take cues from the news flow out of the Eurozone.

US Dollar – US Markets

The US Dollar has continued to weaken against both Sterling and the Euro. Yesterday, the US Dollar lost ground against both the Pound and the Euro after the Fed Chairman, Ben S. Bernanke, indicated that the central bank is prepared to provide additional asset purchases in order to boost growth. With inflation cooling and unemployment remaining at elevated levels, the probability for further easing remains high. Moreover, rate hikes in the US have become a distant possibility as the central bank indicated that it will maintain its benchmark interest rate at near-zero levels through 2014. In a historic move yesterday the Fed officially set an inflation target of 2%. Despite recent robust manufacturing activity in the US, data due today is expected to indicate a slower pace of growth in durable goods orders for December. Moreover, the weekly jobless claims figure is expected to register an uptick. Other economic releases on tap today include the Kansas Fed manufacturing index, new home sales, leading indicators and the Chicago Fed manufacturing index.

Euro – European Markets

The Euro breached the key 1.3100 mark against the US Dollar as traders speculated that the lower interest regime in the US could boost economic growth across the world, including the debt stricken areas in the Eurozone. Additionally, better-than-expected German consumer confidence data for February, aided trading sentiment towards the Euro. However, gains in the currency are limited ahead of the resumption of the Greek debt swap talks later today. The head of the IMF, Christine Lagarde, warned about the extremely difficult situation in Greece in the event of an inability to reach a deal and spooked markets by indicating that Europe is on course for a “disaster”. Aggravating concerns further the German Chancellor, Angela Merkel, expressed her opposition towards a bigger Eurozone rescue fund, stating that there needs to be credibility first. We expect the Euro to take cues today from news emanating from the Greek debt negotiations and Italian debt auction.

Other Currencies – Highlights

The Kiwi Dollar gained against the US Dollar this morning after the Reserve Bank of New Zealand (RBNZ) retained its benchmark interest rate at a record low of 2.5% for a seventh consecutive month. The central bank’s decision was in line with market expectation. The central bank Governor, Alan Bollard, indicated that New Zealand’s interest rates may stay at a record low for longer than he intended a month ago. The Governor indicated that; while financial market sentiment has improved slightly “the global economy remains fragile and risks to the outlook remain”. Yesterday, the Kiwi Dollar strengthened against the US Dollar following the Fed’s decision to maintain its benchmark interest rate at near zero until at least 2014.