Quote:
Originally Posted by medc
With my limited understanding of economics I expected that if the US GDP results were as positive as expected and therefore the US economy became stronger, then the USD would also get stronger while other currecncies like the GPB would get weaker. This is what actually happened with the GBP/USD pair starting at the 12:00 bar (about 1 hour before the news release) and ending around 14:00 - the GBP/USD dropped as I had expected from 1.6565 to about 1.6472, almost 100 pips.
But then I couldn't understand why it started to go up again about 30 minutes after the news release, the GBP/USD went up almost 200 pips. I read that this was because stocks and futures in the US went up in reaction to the good news about the US economy.
So my question is this. If the US economy contracts, it is a good thing for the USD and therefore the USD should go up?? Then why did it actually weaken in relation to the GBP?? How do US stocks and futures affect the USD currency crosses?? Please provide examples if necessary.
thanks in advance.
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Hi Medc,
Changes in the economic landscape paired with shifts in government policy typically have the greatest impact on the currency market however, as the interest rate in the U.S. remains at a record low (0.25%), the greenback has become the most popular funding currency in 2009, next to the Japanese yen. As a result, when investors look for greater return and favor carry trades (buying a higher-yielding currency funded by a lower-yielding one), we see that the U.S. dollar trends to underperform as investors sell the greenback relative to its counterpart. This trend has and continues to drive price action in the currency market, and the correlation with risk is likely to hold throughout the remainder of the year as the FOMC pledges to maintain the interest rate at 0.25% for some time. Nevertheless, as economic conditions improve and interest expectations increase, fundamental drivers are likely to move currencies as we've seen in the past, where a stronger economy results in a stronger exchange rate.
As for stocks and futures, when investors move into higher-yeilding investments such as equities and shun the safe-haven of government bonds, the shift reflects the change in risk trends, and is very helpful in gauging investor sentiment, and we see this typically flow through the currency market as the cost to borrow dollars remains at a record low. Hope this helps.
