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Forex Flash: US Sequester to hurt by 1.5pp 2Q GDP growth; EUR/USD at 1.30 in 1-month - Bank of America

The so-called sequester in the US is supposed to be a bad outcome would hurt economy in the short term. US president Barack Obama is asking for a compromise but Republicans are looking for further cuts and austerity measures.

The 'Supper Committee' has been in talks last weeks but failed to make a proposal. "The negotiations have now devolved into a blame game – the two parties are trying to pin the blame, and the political cost, onto the other party," points the BoA Merrill Lynch Global Economics Team. "As we have expected for some time, the sequester will very likely hit on March 1."

BoA sees a 1.5pp shock to 2Q GDP growth. "We expect the sequester to add further downward pressure to the economy in the second quarter, with job growth averaging less than 100,000 per month and GDP growth slowing to 1%."

While CBO estimates a -0.5% impact on 2013 GDP, and Macroeconomic Advisors estimates that the sequester would cut growth over the four quarters of this year by 0.5%, 1.3%, 0.6% and 0.1% respectively. Bank of America expects "the near-term shock could be slightly bigger than the CBO and MA exercises because they do not include the extra cuts needed to offset overspending in the first half of the fiscal year. We expect a negative shock to GDP growth over this year of 0.4%, 1.5%, 0.7% and 0.2% respectively."

In this line, BoA expects US to grow 2.0 in the Q1, 1.0 in the Q2, 1.5 in the Q3 and 2.5 in the Q4. For the whole year, the bank sees a 1.4% growth in 2013 and 2.6% in 2014. On currencies, BoA forecasts 1.3000 in March, 1.2800 in June, 1.2600 in September and, finally, 1.2500 as price ending the 2013.

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