GDP in line with expectations.

Currencies Direct May 25th 2011 - 2 minute read


GDP in line with expectations.


We’ve just had a second look at Q1 GDP, the big Sterling figure this week. The data is in line with expectations and has no revisions with the figure staying at 0.5%. Sales on the UK high street also held steady according to the latest release from the CBI, but the retail environment remains subdued as the pincer effect from reduced consumer spending and extremely elevated price pressures continues to eat into margins. Almost on cue, MPC member Paul Fisher continued the Banks dovish outlook for the UK economy in a speech yesterday. Mr Fisher emphasised it was the downside risks to growth that had led him to keep rates on hold and even consider if further loosening may be justified. As well as the GDP figure, we have a large amount of other data out.


Christine Lagarde looks set to formally announce her intention to run for the vacant Managing Director job at the IMF, the Greek debt situation continues to dominate sentiment and newspaper inches. On Monday the Governor of the Bank of France laid out the ECB view on Greek restructuring, why restructuring means default and what the dire consequences of following this path would be. Reducing his argument into a couple of sentences will gloss over some details but you will get the gist of why the ECB seems to working so hard to stop any restructuring from happening. Greece restructures, haircuts on bonds will be acutely felt by those holding them, which in order are: the Greek Banks (which would then need to be recapitalised or nationalised by the Greek government); Greek insurers and pension funds; the European public sector, European governments and the central banks – a default by Greece would be the equivalent of a tax on European taxpayers. Finally, any restructuring would mean Greek bonds would no longer we usable as collateral for funding from the ECB, meaning Greece would need to tap the market for funds which would be either impossible or prohibitively expensive. Net effect: Euro sentiment remains weak and the Euro is trading down against the Pound and Dollar.


The risk-on-risk off trade continues to push the Dollar around more than fundamentals seem to justify. This morning risk is being taken off the table, with stock markets opening the day down and the USD gaining ground against the Euro and Pound. Tomorrow sees US GDP figures released, any deviation from market expectations will be important given that we are getting close the end of the Federal Reserve QE2 program.


Report by Alistair Cotton

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Currencies Direct

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