Negative FOMC Announcement Overnight Sends Shares And Pound To US Dollar Exchange Rate Lower

Published: Thursday, 12 July 2012 09:00 BST - Written by Ben Hughes

STORY LINK Negative FOMC Announcement Overnight Sends Shares And Pound To US Dollar Exchange Rate Lower

Yesterday saw a day of indecision in global equities markets – London’s FTSE 100 closed up by a paltry 0.1%, whilst Frankfurt’s benchmark Dax index registered a gain of almost a quarter of a percent on the session. On the other side of the Atlantic, New York’s Dow Jones index was trading down by almost 0.5% by the middle part of the North American session in spite of yesterday afternoon’s data release which showed that America’s trade gap had narrowed to US$48.7bn in May – down from April’s massive reading of US$50.6bn. Market participants had been expecting a slightly sharper narrowing in the world’s leading economy’s trade deficit, and this went some of the way to explaining the negative reaction of global equities markets to the figure.

Predictably, the weaker than expected US trade data caused a shift out of risk from institutional investors, which saw the GBP USD exchange rate pull back from its intraday high of 1.5577 to end the day in negative territory. Last night’s Federal Reserve Open Market Committee announcement struck a distinctly negative tone, prompting further support for the safe haven Greenback. The post-decision press conference revealed that only a few FOMC members had called for further US monetary stimulus, meaning that the GBP USD rate has eased further overnight to stand in the mid-1.54s currently.

The rumbling debt crisis in the eurozone gave market participants further reason to shun risk on the day, as Spain gave further indication that it is losing its struggle to bring its wayward public finances under control. The country’s centre-right Prime Minister, Mariano Rajoy, announced that the sales tax in the debt-addled Iberian state would be upped from its current 18% to 21% in an attempt to balance the country’s books. Rajoy went on to reduce his government’s spending by a mammoth €65bn in the short term. Rajoy’s announcement saw the market turn against the single currency, taking the GBP EUR exchange rate up to its highest level since November 2008, at 1.2706.

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