Double-dip fears realised

26 April 2012  •  Source: Richard Driver, CaxtonFX

Yesterday’s UK GDP figure for the first quarter of 2012 revealed a 0.2% contraction, which when taken with the final quarter of 2012’s 0.3% contraction, means the UK has entered a technical recession and suffered the much-feared ‘double-dip’. In line with its recent strength, sterling weathered the news very well and continues to trade impressively.

Elsewhere the US Federal Reserve was broadly more hawkish but the US dollar was unable to benefit because Fed Chairman Ben Bernanke remained open to further quantitative easing. Today’s session is rather quieter and will likely be spent mulling over last night’s rhetoric from the Fed.

STERLING/EURO: Despite a -0.2% UK GDP figure, sterling has totally reversed losses made on the recession headlines.

• Official statistics revealed that the UK has re-entered technical recession. The figure comes as a surprise after some decent figures last quarter. Headlines regarding a ‘double-dip’ will do little to help the UK’s ailing business and consumer confidence. This pair’s half cent knee-jerk losses have since been recovered, suggesting the market may be suspecting an upward revision to the figure. Regardless, the UK’s economic fundamentals remain more appealing than those of the eurozone and what’s more, the UK government will remain committed to austerity.

• Sterling is back trading up above €1.22 and after its robust recovery yesterday, the risks look skewed to the upside for this pair.

STERLING/US DOLLAR: The US dollar weakens further as Fed Chairman Bernanke keeps QE3 firmly on the table.

• Yesterday’s negative UK GDP number will make the market think again with regard to the likelihood of further BoE quantitative easing but sterling has so far shaken off these concerns. This is not the case with the US dollar however. Ben Bernanke was once again on the dovish side in his press conference, stressing that QE3 remains an option if conditions warrant it. This overshadowed a generally more hawkish Fed last night, which brought forward interest rate projections and provided some more positive near-term US growth projections (2.9% this year).

• Sterling is trading at a multi-month high of $1.62 this morning and sterling’s outperformance looks set to continue for the time-being.

EURO/US DOLLAR: The euro is creeping higher in the face of increasing French political uncertainty.

• French presidential candidate Hollande pledged yesterday that he would not ratify Europe’s fiscal compact, which is designed to ensure member states’ deficits remain below 3.0%. This will have riled Angela Merkel. Sarkzoy has responded by calling a referendum on the issue, again ramping up the uncertainty within the eurozone.

• The US dollar remains soft after Bernanke stressed that QE3 is still a possibility. EUR/USD is trading at $1.3250 this morning and a move up to $1.30 looks possible.

STERLING/AUSTRALIAN DOLLAR: Sterling is a cent off its highs against the aussie dollar, which tracked Asian equities a little higher.

• A rate cut at next week’s Reserve Bank of Australia meeting has now been fully priced in. The aussie dollar performed a little better last night as regional risk appetite improved somewhat. Comments from Ben Bernanke were supportive, any indications that the Fed is willing to turn on the printing presses once again will benefit higher yielding ‘carry trade’ currencies like the AUD.

• Sterling is trading at 1.56 this morning and we may see this pair come under a little more pressure in the short-term.

STERLING/NEW ZEALAND DOLLAR: The Reserve Bank of New Zealand kept interest rates on hold at 2.50%, but was noticeably more dovish.

• The RBNZ was more dovish at its monthly meeting yesterday, warning that sustained strength in the kiwi dollar could result in a review of monetary policy (i.e. an interest rate cut).

• The NZD remained well-supported despite the RBNZ’s rhetoric but this factor is likely to help this pair climb higher in the longer-term, as shown by the AUD’s recent underperformance. Sterling is trading at 1.98 and there remains plenty of upside potential here.

STERLING/CANADIAN DOLLAR: Sterling is on the back foot against the Canadian dollar, which was helped by higher US stocks.

• US stocks have made gains for the past two sessions, after a shaky start to the week, which has helped the loonie. Bank of Canada Governor Carney was once again decidedly hawkish last night, which is likely to add to bets that the BoC will be one of the first major central banks to tighten policy, perhaps as soon as later this year. Upgraded US growth forecasts for this year will also reflect well on the Canadian economy.

• Sterling is trading at 1.59 against the loonie this morning and could well remain under pressure.

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