FX Market Overview

There is no doubt a contraction in the UK economy in the 4th quarter of the year was feared even if it wasn’t in the headline forecasts. Nevertheless, the fact that Britain’s output shrank by 0.2% in Q4 still caused a fair amount of consternation in the markets and the Pound weakened on the news. It should be remembered that the UK economy did grow by 0.9% on the year and we are not yet in a 2nd recession. However, if a technical recession is two consecutive quarters of economic contraction, we are half way there and the press reporting seems to have a touch of glee about it that they can use the expression ‘double dip’ a lot over the next three months. Sterling dived on the news and I know a lot of orders were triggered for those seeking to buy cheap Pounds. For those people it was a good day but Sterling bounced before the close of business and that is perhaps a measure of the fact that the UK is in no worse state than Europe or many other countries. It is perhaps also a reaction to the fact that the Bank of England will inevitably decide to expand the money supply when they meet in February and that is not an entirely bad thing for the UK economy. It would just be nice if some of that money were pushed straight into the job creators in industry rather than shoring up bank balance sheets.
The US Dollar had a better day as fear does tend to boost US Treasury buying. In comparison with Europe, America is a good place to invest. However, people like George Soros are buying Italian bonds in search of attractive yields and a certain degree of guarantee that the European leaders aren’t yet prepared to see Italy default. The same cannot be said for Greece which is being widely condemned for failing to meet its targets on debt reduction and on the introduction of austerity measures. Even German Chancellor Angela Merkel is talking about the inevitability of a Greek debt default. That would be bad news for the Eurozone and probably bad news for Sterling due to Britain’s close trading relations with most European countries.
However, Chancellor Merkel is also under fire from the former French Finance Minister who is now the head of the International Monetary Fund. Christine Lagarde said of Germany’s handling of the debt crisis that a mix of "inaction, insularity, and rigid ideology" was damaging the prospects of recovery from the crisis.
Sorry, I lost my place a bit there; I started talking about America and then, like most of the press agencies, I got sucked back into speculating 0ver Europe. However, the US Federal Reserve met last night and announced there would be little chance of an interest rate rise before 2014. They spoke of modest growth over the next two years and many interpreted this as code for the Fed downgrading their forecasts in light of the problems in Europe.
There is a lot of data due for release today but probably only the US Durable goods figures and US new home sales plus perhaps Japanese inflation are likely to move the markets. Traders are less focussed on data than they are on the rhetoric seeping out of Europe, so we will listen to the utterances of the French, German and Greek authorities with great interest.
As with every day this week, it’s going to be a busy one so I will let you get on with it. Have a great day.