The Pound to US Dollar exchange rate (GBP/USD) grew by just over 0.6 cents yesterday evening, to reach a daily high of 1.5379, as a report from the International Monetary Fund suggested that “global economic conditions have improved during the last six months”.
The report struck a mixed tone of optimism and caution as global growth forecasts were slashed but future prospects were seen to have improved. The IMF rationalised this schizophrenic outlook by pointing to worse-than-expected economic figures towards the end of 2012 that will continue to hamper growth in 2013.
UK GDP projections for 2013 were slashed by a bigger margin than any other major world economy: from 1.0% to 0.7%. British growth is also now expected to accelerate by 1.5% in 2014, compared to previous estimations of 1.8%. The soft UK outlook was blamed on the Coalition’s strict fiscal consolidation targets; the IMF urged George Osborne to relax the pace of austerity in order to give the British economy some room to breathe:
“In the UK, where recovery is weak owing to lacklustre demand, consideration should be given to greater near-term flexibility in the fiscal adjustment path”.
The Fund said that “tight credit conditions and economic uncertainty” are working against economic growth in the UK and suggested that a less stringent deficit reduction plan could help boost Britain forward. The report led to a war of words between the UK Treasury, who denounced the warning and vowed to continue with austerity, and Shadow Chancellor Ed Balls, who criticised George Osborne and asked “how much more damage needs to be done before the Chancellor finally acts?”
The IMF cut its global growth estimate for 2013 from 3.5% to 3.3%, but ascertained that wounds are beginning to heal in the Eurozone and the US. The Fund also expressed optimism towards the Japanese economy in light of the new government’s ambitious asset purchasing programme.
The report mentioned that “private demand in the United States has been showing strength as credit and housing markets heal”, but due to the ‘fiscal cliff’ of spending cuts and tax rises and, more recently the ‘sequester’, the 2013 US growth forecast was cut from 2.0% to 1.9%.
The IMF noted that “acute risks in the Euro area have diminished”, citing the successful Greek aid package, the European Stability Mechanism, and the Single Supervisory Mechanism for banks as reasons for “increased viability” of the 17-nation bloc.
The Fund said that the Japanese stimulus package, equivalent to around $68 billion a month of asset purchases, “will boost growth in the short term”, but warned that “ambitious growth and fiscal reforms” will also be required to ensure that the Japanese revival sustains momentum.
With gold prices recovering +2.6%, following their dreadful -14% tumble between Friday and Monday, and the UK Consumer Price Index remaining well above-target at 2.8%, the mixed bag IMF report carried just enough oomph to kick-start a revival of risk sentiment in Sterling’s favour. The US Dollar was subject to a soft CPI inflation reading of 1.5%, and continued to be weighed down by the recent run of soft data: most notably Retail Sales and Non-farm Payrolls.
If this morning’s Bank of England Minutes report shows that policymakers are reticent to embark on further quantitative easing measures whilst the inflation outlook remains dangerously high, then the Pound to US Dollar exchange rate (GBP/USD) could look to higher rates in the region of 1.5400-1.5410, where both psychological and technical resistance lies. Conversely, a dovish policy statement could cause Sterling’s latest rallies to collapse and send GBP/USD back down towards support at 1.5260-70.
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