US Growth Disappointment Can’t Derail Dollar

A disappointing US GDP figure led market participants to push against recent dollar strength and raise equity prices yesterday, although we, like most analysts, believe that it will have little bearing on the Fed’s decision making process in regards to the tapering of asset purchases.

Q1 GDP was shown to have grown at 2.6% from the previous reading of 3.4% on an annualised basis, with a large proportion of the revision lower coming on the back of weaker consumer spending. If you cast your mind back to Q1 the key phrase that everyone was using towards the US economy was ‘fiscal cliff’. Policy has changed since then, as has the data for the better.

Lost in the noise was the continual low reading of the Fed’s preferred measure of inflation, PCE. This remained at 1.3% in Q1, and is more likely to act as a delayer of monetary policy tightening going forward than a stale growth number.

The UK Spending Review had very little impact on sterling yesterday. The broad gist of Osborne’s speech was somewhat confused, it was not exactly a tilt at austerity nor a shift towards infrastructure. Infrastructure spending can be increased from long term capital raising, and must be, if we want to accelerate the UK growth profile from passable to something better.

The general US dollar strength continued through the session against both EUR and GBP and has pushed EM currencies closer to the brink. INR hit another all-time low against the greenback yesterday, as the central bank failed in its attempt to defend the key psychological 60.00 level.

European data can also be thanked for helping risk onwards yesterday as German consumer confidence hit a 6yr high although we worry about the decoupling risk of Germany away from the rest of the Eurozone; it is unlikely that we will see record consumer confidence numbers in France, Italy, Spain or Greece anytime soon.

Mario Draghi’s insistence that the ECB’s monetary policy plan will remain accommodative have helped quiet the recent wobbles in European periphery debt although an Italian bill auction yesterday raised fears that demand for peripheral debt is slipping.

Good news is likely to be found in the UK GDP announcement at 09.30 which should confirm growth in Q1 of 0.3%. This afternoon’s PCE inflation figure for May will be key for tapering expectations as well.