World Bank Global Growth Forecasts and the Forex Market

Ready for some grim news? It appears that the June World Bank Global Growth forecast revealed some pretty bleak figures, as it showed that the growth outlook for 2013 had been downgraded.

According to the World Bank, global growth will only be at 2.2% this year and not 2.4% like it had initially expected. Moreover, the estimate for 2014 was lowered to 3.0% from 3.1%. If you’re going to focus on the developing countries alone, the forecast was reduced to 5.1% from 5.5% for 2013.

The outlook might be generally bleak, but some good news could be found in the report. Specifically, the growth outlook for the U.S. and Japan were both upgraded from January’s report. U.S. growth was raised to 2.0% from 1.9% while Japan’s was increased by a whopping 0.6% to 1.4% from 0.8%. The World Bank indicated that the estimates were revised higher due to the massive amount of fiscal and monetary policy stimulus that had been implemented since the January’s report.

The question I’m sure all of you are asking though is, what does this mean for us forex traders? The goods is that today, I answer those questions!

What this means for Japan and the yen?

While it is a positive change, it still remains to be seen whether it will really happen or not. Keep in mind that Japan isn’t living in a vacuum so even though the forecast has been improved, weaker growth elsewhere could negatively impact Japan’s trade industry and hurt its growth. Another issue is that good news could cause the yen to appreciate even more, which goes totally against what the Bank of Japan wants.

Should this trend continue, the yen could go even higher and completely cancel out the effect of the stimulus that the World Bank points to as a reason why Japan should see further growth.

What this means for the U.S. and the Greenback?

Right now, everything is about the Fed.

In recent months, there has been speculation that Big Boss Bernanke and the rest of the FOMC policymakers have been divided in their opinions regarding monetary policy. Some believe that there is enough evidence of economic recovery to begin withdrawing stimulus measures. Others though, think that it’s way too early to think about scaling back bond purchases, and that by doing so, it could send Uncle Sam back into recession mode.

This has traders on the edge of their seats, as they are still trying to assess what exactly the Fed plans to do.

Now that the World Bank is anticipating slightly faster growth from the U.S., will this tilt the odds in favor of the FOMC hawks? After all, faster growth could lead to inflationary problems down the road, which gives ammunition for the hawks to gun for higher interest rates. This in turn, could help boost the Greenback.

What this means for the Aussie and Kiwi?

With Chinese growth expected to be much lower than initially anticipated, we could see a trickle down effect on the Aussie and the Kiwi.

Remember, the Aussie went on a steep drop in May thanks interest rate cut speculation. With China – one of Australia’s biggest clients in terms of raw materials and minerals – slowing down, the pressure may turn to the Reserve Bank of Australia to do more. This might just intensify expectations of another rate cut sometimes over the next couple of months.

Meanwhile, let’s not forget that China is New Zealand’s second largest trading partner. Lower demand from China will hurt the Kiwi economy, which may also lead to action from the Reserve Bank of New Zealand.

So while the World Bank downgrades didn’t have too much of an effect on price action, it is still something worth keeping an eye on for the remainder of the year. Make sure to tune in regularly to find out if we see any more revisions from the international organization!