UK GDP Q1 update

The markets have reacted fairly positively to the news that the UK economy expanded by 0.5% in the first quarter of the year.

This is still fairly grim reading, especially since construction output tumbled to its lowest level since Q1 2009, contracting 4.7% over the quarter. Although services bounced back, at 0.9 per cent over the quarter this suggests the important services sector won’t be able to pick up the slack caused by fiscal consolidation in the coming months, not at current growth rates anyway.

There were some good spots in the report, the rebound in transport and communication along with business and finance was good news. But there was some disconcerting reading too, like the increase in government output and other services, which expanded by 0.7% in the first quarter after a 0.1% decline in Q4 2010. How long the government can continue to spend on the service sector is dubious if the public purse strings get prised shut by Mr Osborne as planned. However, according to the Office for National Statistics, most of this growth was down to healthcare spending, which has been ring-fenced from cuts by the coalition, suggesting that the government could add to growth for some time yet…

The forex market liked the report and the pound has made fresh highs for the day at 1.6540/50. There is no denying that part of cable’s strength is dollar weakness, but the market was caught short of pounds this morning and that led to a flurry of excitement at the bottom of the hour.

However, as we mentioned earlier, the Inflation Report next month is the key data release as that will tell us how far we are from UK Interest rate normalisation. This should leave sterling crosses trading in a range until then, with GBPUSD well supported above 1.6200.

Although Gilts sold off on the report (yields rose) the market is still not expecting the Bank to hike next month and there are just over two hikes priced in by the end of 2011.

Источник: Forex.com

27.04.2011