A volatile day in the fx markets saw the pound gain against the euro in the morning on the announcement that the UK’s gross domestic product (GDP) grew at a rate of 0.2% in the second quarter of 2011, following the 0.5% pace seen in the first quarter of 2011 in data published by the Office of National Statistics.
Although market consensus was for a reading of 0.2%, recent market commentary has actually been taking a decidedly negative bent so the fact that the actual figure came in as expected was initially taken as a positive!
The realisation that after two quarters of zero growth, an expansion of just 0.2% can only be considered as ‘meagre’ came later and saw the pound give up the morning’s gains against the euro.
The US dollar continues to bear the brunt of market nerves as the long, drawn out standoff between the White House and Republicans sent the dollar index, which measures the US currency against a basket of six others, down again. The failure to reach a budget plan designed to prevent the US from defaulting on its debt has seen the dollar suffer heavy losses recently.
The US dollar skidded to an all time low against the Swiss franc and also fell to a four month low against safe-haven peer, the yen.
The US has a deadline of 2 August to find an agreement on raising its debt ceiling which currently stands at $14.29 trillion. Otherwise there is a threat of a default and a string of credit rating downgrades. Moody’s, Standard & Poor’s and Fitch have all warned they may cut the US’ AAA rating. The US has held a AAA credit rating since 1917 and some analysts are suggesting that the fallout from a downgrading would be much more serious to the world’s economy than the fallout from the failure of Lehman Brothers in September 2008.
The General Director of the International Monetary Fund (IMF), Christine Lagarde, added her voice to the calls for Washington to solve its debt problems immediately and to end the negotiations that are blocking the debt ceiling from being raised. She warned of the serious consequences for the global economy if the ceiling is not raised. “The clock is ticking,” she said, “The issue needs to be resolved immediately.”
Despite the uncertainty in Washington, the Australian dollar, a high yielding currency highly sensitive to risk sentiment made strong gains in the overnight Asian markets on the expectation that the Royal Bank of Australia will increase its benchmark interest rate at their August meeting.