The pound fell on the announcement yesterday morning that the UK economy contracted by a bigger than expected margin of 0.2% in the fourth and last quarter of 2011 but a steady stream of poor economic data from the euro zone in the afternoon allowed the pound/euro rate to end the day virtually unchanged. After hours, the news from the |Federal Reserve gave a boost to the bulls and risk appetite soared lessening demand for the US dollar’s safe haven status.
In the UK, Office for National Statistics (ONS) reported that UK Gross domestic product (GDP) growth in the United Kingdom contracted at an 0.2% quarterly rate in the fourth quarter. The consensus estimate was for a fall of 0.1% in quarter-on-quarter growth. The tally for the previous quarter was left unchanged, at 0.6% on the quarter.
By sectors of activity, output in construction rose by 0.5% (Previous: 0.3%), remained flat in services (Previous: 0.7%) and fell by 1.2% in the production industries.
As expected, the minutes of the Bank of England’s (BoE) monetary policy committee from their meeting on 12 January showed 9-0 votes both in favour of keeping UK interest rates at their historic lows of 0.5% and keeping the asset purchasing scheme, commonly known as Quantitative Easing (QE) budget unchanged at £275 billion for the time being.
Perhaps a pointer towards the February meeting of the MPC is the fact that even those members of the MPC who thought that further asset purchases were likely to be required thought that, “there was no compelling need to increase the scale of the programme of asset purchases before completing those already announced.” The fact is that the current second round of QE taking the balance up to a total of £275 billion expires at the end of January!
After hours, the US dollar turned lower against major currencies as the Federal Reserve surprised markets with its pledge to keep interest rate close to zero until late 2014.
The Federal Open Market Committee said while the US economy was expanding moderately, the US unemployment rate was still elevated and as such the economy still faced “significant downside risks.”
In recent months, the dollar has been gathering momentum on stronger than expected US economic data. However the Fed’s announcement that interest rates would remain low for some time sent many dollar traders towards the door. The central bank also said it stands ready to implement more quantitative easing if the outlook worsens.
The sole bit of good news out of the euro zone showed that the German Treasury sold €2.46 billion in 30-year debt on bids for more than €5 billion. The average yield offered from this security was an all-time low of 2.62%, down from 2.82% the previous auction. Officials at the German Treasury commented that the latest debt auction results were “impressive”, saying that the low yields offered reflects the current volatile and uncertain environment.
Yesterday evening at the annual World Economic Forum at the Swiss ski resort of Davos, German Chancellor Angela Merkel has once again insisted in the need for a “unified Europe”, repeated her call for a union of “budgets, competition and solidarity”.
Commenting on the euro zone crisis, Merkel feels that “we must ask ourselves what role Europe should play in the world” and added that “we must show that all of the (member states) are strong, although some stronger than others (…)We can only be successful if we are unified.”
Merkel explained Germany’s stance against the concept of Eurobonds or an increase in the bailout fund: “What we do not want is a situation where we promise something that in the end we cannot deliver – because then Europe will be really vulnerable.”
But in a more optimistic tone, she declared herself to be “convinced that we can keep this whole Europe together”.
