FOREX-Dollar still hurt by U.S. GDP revision, pound soft before BoE report

Thu Jun 26, 2014 4:01am EDT

Related Topics

* US economy shrank by annualised 2.9 pct in Q1

* Some see USD setback as temporary as data improves

* Focus on BoE's macro-prudential measures, sterling

By Anirban Nag

LONDON, June 26 (Reuters) - The dollar index languished near one-month lows on Thursday, still held back by surprisingly weak U.S. first-quarter GDP data, which has bolstered expectations that monetary policy will remain loose.

In the European session, the focus will be on the British pound and the impact from the Bank of England's report on financial stability. The BoE is expected to take measures to cool the housing market and potentially ease pressure to raise interest rates.

The dollar index was at 80.177, having fallen to as low as 80.091 on Wednesday, a low not seen since May 22, as investors reacted negatively to data showing U.S. gross domestic product contracted by an annualised 2.9 percent in the first quarter, the sharpest decline in five years.

While economists said other data showed the economy rebounding in this quarter and the weak first-quarter GDP was mainly due to one-off factors, it still gave no reason to expect the U.S. Federal Reserve would increase interest rates anytime soon.

The benchmark U.S. 10-year Treasury yield skidded to a three-week low of 2.529 percent in the wake of the data. It recovered to 2.557 percent on Thursday, but was still below Wednesday's U.S. close of 2.559 percent.

Traders said if U.S. data later in the day shows consumption ticking up along with prices in May, the dollar could get a boost. The price index for personal consumption expenditures, watched by the Federal Reserve, is expected to have reached its highest since late 2012 in May.

"The GDP numbers were a shocker, but they are backward looking. The data lately have been good, especially a pick-up in consumer confidence, and if spending and inflation beat expectations today we could see the dollar recover," said Niels Christensen, FX strategist, at Nordea.

"But most of the upswing in the dollar could come next week as month-end factors are likely to help the euro."

The euro bounced to a three-week high of $1.3652 on Wednesday and was slightly up on the day on Thursday at $1.3633, while the dollar was down 0.1 percent against the yen at 101.77 yen.

Still, yen gains were likely to be limited by expectations that the Bank of Japan might have to ease policy again by December, according to a Reuters poll published on Wednesday.

STERLING FOCUS

Sterling eased to $1.6972, not far from Wednesday's one-week low of $1.6952. The euro ticked slightly higher to 80.305 pence, trading close to its highest in two weeks and stretching gains into a third straight day.

The BoE is likely to announce measures to rein in fast-rising British house prices, which Governor Mark Carney has warned are the biggest domestic threat to financial stability.

Some think that such macro-prudential measures will reduce the likelihood of an interest rate hike this year. That has reinforced the slightly softer tone to sterling since comments from BoE policymakers on Tuesday dampened market speculation that a first rate hike could come before the end of the year.

Most, though, expect the measures to be modest and say they are unlikely to have a lasting effect on the pound.

"Carney has already stated that macro-prudential policy measures are not a substitute for rate hikes, so the announcement today is unlikely to alter rate hike expectations and the pound's direction," said Lee Hardman, currency analyst at Bank of Tokyo Mitsubishi. (Editing by Susan Fenton)

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