Daily Market Report 26/07/2013

Data yesterday confirmed that the UK grew for the second consecutive quarter for the first time since 2011. Whilst this is encouraging, it is far from spectacular and thus the pound weakened all across the board.

The UK GDP figures fell in line with expectations coming in at 0.6%, rising from 0.3% in the first quarter. As stated above, the figure was hardly surprising and dampened prospects of the Bank of England ending accommodative policy. Investors will now focus on the August 1st monetary policy meeting and its quarterly inflation report on August 7th to see what action the Bank of England will take next, in particular with reference to its ‘forward guidance’ policy mentioned a couple of weeks ago.

Early indications suggest that the Bank of England will keep interest rates at the record low of 0.5% for longer than markets were anticipating as well setting future interest rate guidance based upon on an improvement in unemployment or greater tolerance for inflation.

Despite the International Monetary Fund (IMF) issuing a fresh euro zone crisis warning, the euro was well supported following data in the morning showing that German business climate rose to 106.2 in July from 105.9 in June. IFO current assessment also rose in July from 110.1.

The IMF warned later in the afternoon that the austerity programmes being implemented across the single bloc could wipe between 1% and 1.25% off annual GDP, unless countries start slowing down their respective programmes.

The IMF also urged the ECB to inject more liquidity into the financial system in the form of repeating the Long-Term Refinancing Operations (LTRO) that was conducted at the end of 2011.

Despite durable goods orders rising by 4.3% in June instead of an expected increase of 1.3%, the US dollar weakened across the board as the number of people filing for jobless claims increased more than expected to 343,000. An improvement in the job sector is required for the Fed to taper their monetary stimulus programme and thus these figures did little to suggest to investors that the Fed could be doing this soon.

The US dollar suffered more weakness towards the end of the US trading day after John Hilsenrath of the Wall Street Journal released a report suggesting that the Fed will keep its monetary policy on hold in next week’s monetary policy meeting and will maintain its accommodative stance – for now anyway. Given this we could well see the US dollar weaken further leading up to the policy statement on 31st August.

The calendar is pretty bare today with only consumer sentiment figures from the University of Michigan due from the US.

Key Announcements:

14.55pm – USD – Michigan Consumer Sentiment (Jul): Expected to rise to 84.