by Jon Beddell
Britain’s economy grew by just 0.2% in the first quarter of 2010, much less than the 0.4% expected by analysts. The soft data released on Friday had an immediate impact on sterling, which retreated sharply, but recovered to end the session unchanged. This morning the pound is ticking higher as investors, having digested the growth data, decided that there’s a good chance of it being revised higher for the final reading. Also helping to cushion the blow is the fact that retail sales skewed the figures after being hit by the particularly harsh winter.
It’s a big week ahead for the US data calendar, with the latest interest rate announcement from the Federal Reserve on Wednesday, followed by the first quarter growth figure on Friday. Interest rates are almost certain to stay on hold at the record low of 0.25%, but investors will be watching closely for any change in language. Specifically, the Fed’ have made a habit of stating that rates will remain low for “an extended period”. Markets are hanging on to that key phrase as a sign that rates will stay unchanged for the next few months. Dropping that phrase would therefore be the Fed’s warning to the market that a rate rise is on the way. Turning to growth, analysts are expecting an annualised growth rate of 3.5% in the first quarter, compared to 5.6% in the last quarter of 2009.
Data aside, the underlying story driving the markets is of course, the general election. Interestingly, sterling has actually been rising as the spectre of a hung parliament looms ever larger. The traditional view is that a hung parliament is bad news for the pound because no one party would have the clout to force through financial reforms and tackle the budget deficit. Press comment over the weekend has pointed toward other countries that have run successful coalition governments, in particular Germany, and the current strength of sterling may support that view.
The pound has also benefitted from renewed concerns over the Greek bailout. The Euro has been on the back foot even as Greece’s finance minister promised over the weekend that aid will be delivered in time to stave off a potential default, but markets are unconvinced of exactly how and when funds will materialise. Greece is due to repay €11bn by the end of May in interest and refinancing costs.
Robust US manufacturing and home sales data helped to renew positive sentiment toward the global economic recovery. The US dollar has been in a holding pattern against almost all other major currencies over the last two weeks, balanced by better domestic data (which perversely tends to weaken the dollar as investors move toward higher yielding/riskier assets) and the Greek debt story which is keeping all eyes on the news wires in case the sovereign debt problems spread to countries like Spain and Portugal. Meanwhile, stock markets continue to march ever higher!
The technical outlook remains positive for sterling. We have spent a couple of weeks trading mostly above the March high at 1.5380, and seem to have established a new foothold at 1.5300 on Friday. If we can now progress above 1.5524 (the April high to date) then sterling should continue to do well. The next noteworthy resistance points are 1.5575 and then 1.5821. Clients should still take a cautious approach and consider placing stop orders below 1.5190 (based on the interbank rate). That was last week’s low, and a break below there would do serious damage to the short term up trend that we’ve established over the last few weeks.
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