U.S. economy unexpectedly contracts in 4th quarter; market awaits Fed statement
Euro rises above resistance at $1.35, highest since Nov. 2011
Sterling slide continues, economy worries remain
USD- The US dollar fell to a 14-month low against the euro after data showed the U.S. economy unexpectedly contracted in the fourth quarter, in contrast to an improving economic outlook in the euro zone. According to the Commerce Department, U.S. gross domestic product fell at a 0.1 percent annual rate, suffering its first decline since the 2007-09 recession and denting hopes the Federal Reserve may end its bond-buying stimulus measure sooner rather than later. The Fed concludes its two-day meeting later in the day and while it is expected to keep monetary policy on a steady path, intensive debates continue behind the scenes over when the controversial bond-buying program should be curtailed. A separate report showed U.S. private employers added 192,000 jobs in January, more than economists were expecting, in a sign of growth in the labor market. The data comes ahead of Friday’s all-important government nonfarm payrolls report.
EUR- The euro rose against the US dollar to its strongest level since November 2011. The single currency picked up momentum after it broke above an option barrier and psychologically important level at $1.3500, with traders citing sustained demand from model and macro funds. Euro zone economic sentiment improved more than expected across all sectors in January, rising for the third time in a row in a sign the economy could be emerging from a low point in the fourth quarter of 2012. The European Commission's economic sentiment index rose to 89.2 points in January from 87.8 points in December, against market expectations of an improvement to 88.2. The recent trend of euro strength could be maintained with rising euro zone economic sentiment and comments from European Central Bank policymaker Ewald Nowotny that the recovery was seeping into the real economy.
GBP- Sterling hit an 11-month low against a basket of currencies and its’ lowest in more than a year against the euro, reflecting growing concerns over the UK economy at a time when those about the euro zone are easing. The pound has been one of the main places investors turned to in the search for a safe haven from the euro's troubles and an easing of three years of crisis have led to that trend reversing. Sterling has suffered since figures last week revealed the UK economy shrank more than expected in the fourth quarter, raising concerns about a possible credit ratings downgrade and the prospect of more monetary easing. Focus this week will center on Friday's purchasing managers' survey on manufacturing for January. This could weigh further on the pound if it suggests the UK economy has begun 2013 badly and could be heading for a "triple-dip" recession.
JPY- The Japanese yen fell to a fresh 2-1/2 year low against the US dollar, pressed by widening spreads between U.S. Treasuries and Japanese government bond yields amid expectations of more aggressive easing by the Bank of Japan in coming months. The Japanese yen should stay weak even if movement in the dollar/yen exchange rate is confined in the coming days by market talk of very large option maturities in the 90-91.50 yen area.
Commodity Currencies- The Antipodean currencies held firm against the US dollar as rising equities helped sentiment toward risk assets and commodities. The Australian dollar hit a fresh four-year peak on the yen as investors took comfort from improving global economic prospects. The New Zealand dollar is awaiting a series of events, including the Reserve Bank of New Zealand's (RBNZ) first rate review of the year on Thursday. Although neither the RBNZ nor Fed are expected to alter rates, but the kiwi has been seen benefiting from widening interest rate differentials, with the NZ-US three-year swap differential touching a five-month high. The Canadian dollar eased slightly against the US dollar after data showed the U.S. economy unexpectedly contracted in the fourth quarter, suffering its first decline since the 2007-09 recession. The Canadian currency has recently settled into a fresh range between C$1.01 and par value with the US dollar after weakening sharply last week on a dovish shift in the Bank of Canada's stance.
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