GDP Data Softens QE Prospects

With the BoE Governor, Mervyn King, indicating that next month’s monetary policy meeting would be a close call, the upbeat third quarter GDP figure appears to have tipped the scales in favour of the bank pursuing its wait and watch approach and leaving its monetary policy tools untouched next month. Receding hopes of further QE has strengthened the Pound, but next week’s PMI releases hold potential to once again assuage current optimism. Meanwhile, surging orders for durable goods in the US have sparked a fresh wave of optimism ahead of today’s third quarter GDP reading, which is expected to buck the trend of slower growth shown in the previous two quarters.

Pound Sterling – UK Markets

The Pound moved sharply higher against the Euro and the US Dollar in yesterday’s trading session after data revealed that the British economy grew at a faster-than-expected pace for the third quarter. This has dampened prospects of the BoE adding more stimulus in its next monetary policy meeting. With mixed messages emerging from the BoE, yesterday’s rally in the Pound highlights that policymakers may choose to hold fire and wait for further cues before taking any decision to alter current monetary policy stance. Meanwhile BoE policymaker, Paul Fisher, sounded more upbeat about the UK’s economy as he stated that the condition of the British economy was not as grim as earlier figures had highlighted and added that the central bank’s Funding for Lending scheme was showing promising signs. Further supporting the optimism the Chancellor, George Osborne, opined that the GDP figures showed that the economy was on the “right track”, but warned of challenges ahead. With no domestic economic data today and Sterling trading in a relatively tight range against the majors, GDP data from the US will be watched for further direction.

US Dollar – US Markets

The US Dollar has garnered some strength in today’s trading session, as traders turned increasingly cautious about the global economy. The latest quarterly results from major US companies highlights the grim state of affairs, while prevalent concerns surrounding debt problems in the Eurozone continue to hurt sentiment. Earlier today, S&P lowered its outlook on major French banks, citing increased economic risks. Meanwhile, markets are expected to be glued to the US GDP figures due for release later today, which is likely to show an improvement in the third quarter. The GDP reading will be watched closely, given its influence over the Fed’s monetary policy and the build up to the elections next month. Orders for durable goods posted their largest gain in more than two-and-half years last month, highlighting the change in sentiment following the latest round of stimulus undertaken by the Fed. Following distortions caused by seasonal variations, jobless claims figures released yesterday showed that the labour market is making limited progress. Apart from the GDP figures, markets are also expected to keep an eye on the consumer confidence reading later today.

Euro – European Markets

The Euro hovered close to yesterday’s lows and edged closer to the 1.29 mark against the US Dollar, as traders stayed cautious amid increasing signs that the core Eurozone nations are falling prey to the region’s debt crisis. Dismal German manufacturing PMI data and increasing risks to the French banking system, due to current exposure to the European environment, have bought these concerns to the fore. S&P lowered its credit rating on BNP Paribas and ten other French banks, including Societe Generale and Credit Agricole. Additionally, the state of the labour market in the peripheral regions remains a concern after data indicated that Spain’s unemployment rate breached the 25% mark for the third quarter. However, offering some solace, GfK indicated that German consumer confidence climbed to a five-year high for November, as rising wages and falling unemployment outweighed concerns surrounding the sovereign debt crisis and slowing economic growth. In the absence of major European economic releases today, the Euro is expected to track the GDP data from the US for further direction.

Other Currencies – Highlights

The Japanese Yen has recovered some of its recent session losses and is trading higher against its major peers this morning on account of safe haven buying. However, the keenly eyed consumer price inflation data revealed that the deflationary trend in the Japanese economy persisted. Additionally, the Tokyo CPI, which is seen as a leading indicator for price trends in Japan, also showed no signs of the deflationary threat abating. Meanwhile the Japanese Prime Minister, Yoshihiko Noda, announced an emergency fiscal stimulus package worth ¥422.6 billion in order to prevent the Japanese economy from falling into a recession. On the macro front retail sales, industrial production and unemployment figures are releases to watch out for, ahead of the central bank’s monetary policy meeting next week. Markets are also expected to pay attention to next week’s manufacturing PMI and housing starts figures for more cues about the Japanese economy.