LONDON -- (Marketwire) -- City Index UK: Today's surprise 0.1% contraction in US Q4 GDP challenges the notion of an exit strategy from the +85 bn in monthly asset purchases and keeps the Fed firmly in the path of pursuing its 6.5% unemployment target, the implications of which are a weaker US dollar.
Neither a fresh five-year low in US jobless claims tomorrow or a surprise +200K print in Jan NFP is expected to remove the Fed doves from maintaining +85 bn in monthly purchases in the first three month of the year.
The GDP report shifts markets' attention further to the immediacy of the US debt ceiling, which takes precedence over the Fed's language/guidance on for 6-12 month's horizon. Five-year lows in jobless claims and five-year highs in equity indices support the case for reconsidering QE3 duration, but periodic disappointments such as today's GDP figure and yesterday's 15-month lows in US consumer confidence will give the Fed doves the upper hand over the hawks.
We have been here before. Each time the euro rises 10% from its cycle low, Eurozone politicians (and some ECB members) rush into making claims of the euro being overvalued with the intention of stabilizing the threat to competitiveness.
Such claims are misplaced due to the fact that: ECB is the only major central bank engaged in actual tightening, with its balance sheet shrinking [5% since June vs. +5%, +15% and +9%] for the Fed, BoE and BoJ respectively, relative policy flows are further boosting euro momentum. 32-month highs in German business sentiment, fully subscribed bond auctions from Italy and Spain and are also a manifestation of robust market metrics. Read more...
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