In contrast to Britain’s laughably poor economic growth figure earlier in the week, data this afternoon has shown that the US economy expanded by an annualised 3.2% in the final three months of 2010. Although the figure is marginally below the median forecast (3.3%), it does reaffirm the improving economic conditions seen in the US at present.
Earlier in the week the Fed stood by its stance to keep interest rates on hold “for an extended period” and I doubt that today’s figure will alter that view in any way. The real thorn in the side for the Fed is the stubbornly high rate of unemployment. Until economic growth starts to bring jobless numbers down we can expect the Fed to stand pat on policy, despite the recent addition of a couple of hawks onto the voting council.
We have seen a slight pickup for the dollar this afternoon. The GDP figure, although solid, is hardly setting the headlines alight and I think traders will probably be content to close up shop early for the weekend without the need to rush into new positions. However, looking to next week I expect that the dollar could begin a steady comeback as the disparity between the strength of the US and UK’s respective recoveries is made evident.
The pound’s been floating around up near $1.60 for the past two weeks, helped in part by a firmer euro and higher interest rate expectations. With those expectations now dashed and the euro looking vulnerable at $1.37, I can see a brighter outlook for the greenback.
Clearly conditions in the US are improving and the markets expect another positive employment change number at the end of next week. Certainly when compared to the snow bitten UK economy and the debt ridden eurozone, the US is looking like an increasingly good bet. And for those investors still looking for a safe-haven, Japan’s credit downgrade has down the yen no favours giving another reason to look out West.
The factors are building in favour of a stronger dollar. One convincing order on the sell side of EUR/USD and the trend will turn.
Duncan Higgins
Senior Analyst – Caxton FX
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