Sterling stages rally after GDP figures present mixed picture

Tom Tong26/May/2011Currency Updates

GBP

Sterling extended its gains from Wednesday on somewhat ambiguous fundamentals. The headline growth reading offered a 0.5% quarterly improvement and a 1.8% year-over-year improvement. However, paying closer attention to detail from those areas that we generally consider to offer sustainable growth, the figures were disappointing. Personal consumption dropped 0.6% while investment dropped 4.4% through the period.  That should set off a few alarms for medium-term growth prospects when we consider it was a 1.0% increase in growth and the biggest contribution to activity from net trade (1.7%) on record that kept the underlying figure propped up. MPC member Andrew Sentance perhaps added a level of legitimacy to the bullish drive later on when, before bowing out, he suggested that rate hikes should be implemented now to avoid more dramatic efforts later down the line. But like the Fed’s Kocherlakota, the market is well aware of Sentance’s position. If the move is based on mere risk appetite trends sterling could soon lose its buoyancy.

There is no significant UK data scheduled for release today. However, the market will listen when MPC Member Tucker speaks this afternoon.

EUR

The euro fell to a two month low against the pound yesterday, reaching its lowest level since March 15, breaking below its 100-day moving average, as computer-generated trading accounts threw out sell signals.

The single currency showed some brief resilience against the dollar after Finland approved an EU and IMF bailout for Portugal. However, gains were short lived and the euro went on to suffer broadly, pressured by Greek newspaper reports that the Greek government is considering organising a referendum on additional austerity measures after it failed to reach consensus with the opposition, casting further doubt on the country’s ability to tackle its debt crisis.

USD

Due to the US GDP revisionary figures released today the US dollar came under intense selling pressures in overnight trade, posting losses of as much as 0.6% against its major counterparts. Due to the lack of European data releases, the spotlight will be will be in the GBP figures released. With expectations of a Q1 growth reading to be increased from the originally reported 1.8% to 2.2%, it could certainly prove to be a volatile day for the greenback as risk appetite sentiment could swing either way. At present, risk seems to be treating this forecasted increase as a positive development, despite the implications that the Fed may come under crossfire to increase rates. If the released data is as expected and we do not see a downside data surprise, it points the way to strengthening of a basket of currencies that are paired against the dollar.

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Written by Tom Tong

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