British GDP Improves But Pound Stays Put

 | Oct 25, 2013 08:09AM ET

The British pound is showing little movement in Friday trading. In the European session, GBP/USD is trading close to the 1.62 line. Taking a look at economic releases, British Preliminary GDP posted a gain of 0.8%, climbing to a four-month high. In the US, today’s key release is Core Durable Goods Orders. The markets will also be keeping a close eye on the UoM Consumer Sentiment, an important consumer confidence indicator.

There was more good news from the British economy, which continues to pick up steam. On Friday, Preliminary GDP posted a strong gain of 0.8%, up from 0.6% the month before. The reading matched market expectations, and is likely to increase speculation about whether the BOE might raise interest rates in the near future, despite repeated assurance from BOE Governor Mark Carney that he has no intention of doing so before 2015. If key indicators continue to improve, Carney and his colleagues may have to seriously consider slicing rates sooner rather than later.

Earlier this week, the BOE voted unanimously to maintain its stimulus and monetary policy, as the QE program remained pegged at 375 billion pounds, while the benchmark interest rate was kept at 0.50%. Both decisions were unanimous (9-0). The Bank's policymakers stated that the UK economic recovery was "robust", and hence there was no need to increase monetary stimulus or interest rates at the present time. The improving British economy has given a boost to the British pound, which has posted gains of close to 5% in the past six months, outperforming other major currencies.

It’s been an uninspiring week for US employment releases. On Thursday, Unemployment Claims came in at 350 thousand, above the estimate of 343 thousand. This weak figure came on the heels of Non-Farm Payrolls, which slipped to a six-month low. The US unemployment rate dipped to 7.2%, a five-year low, but this does not point to increased employment, as the participation rate remained at 63.8%, its lowest level since 1978. These figures indicate that the US labor market continues to have difficulty creating new jobs. The weak readings are putting pressure on the US dollar, which finds itself at two-year lows against the euro.

There was some optimism and relief in the markets last week, as the Republicans and Democrats finally reached an agreement last week to reopen the government and raise the debt ceiling, following weeks of fighting in Congress. However, the deal provides short-term relief only - the government will be funded until January 15, while the debt limit will be raised until February 7. Both sides have agreed to discuss budget issues and try to reach a long-term agreement before December 13. The bottom line? The US could face a repeat of the shutdown and debt crisis started in just a few months. At the same time, the public is angry at lawmakers for allowing the budget deadlock to drag on for weeks, and with congressional elections only a year away, politicians on Capitol Hill should think twice before plunging the country into another fiscal and political crisis.

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The US government is again functioning and a default has been averted, but the agreement hammered out in Congress last week provides short-term relief only, as it raises the debt ceiling until early February and funds the government until mid-January. The underlying budgetary issues remain unresolved, consumer confidence has been shaken and employment numbers are not looking good. Given this situation, the Fed is unlikely to push the taper trigger until early 2014, perhaps not before March or April.