- Weak UK GDP holding back GBP for now – looking to short EURGBP
The worse-than-expected UK GDP print was the focal point this morning, against a back drop of rebounding risk appetite and equity markets. The first release of UK Q1 GDP showed that the UK economy contracted 0.2%, weaker than expectations of 0.1% q/q growth. There had already an expectation that the construction sector, which declined 3% q/q, would weight heavily on the UK’s recovery, but the soft release was also driven by a contraction in industrial production and weak service sector growth. However, we do not expect today’s GDP release to trigger the end of the bullish-GBP theme that has been played out by the market over the past week. The MPC suggested in last week’s minutes that it had written off the Q1 GDP print in advance, characterising the weakness in the construction data as “perplexing”. We are therefore able to look through the weak GDP print and focus on the improvement of the forward looking surveys as a supporting driver for GBP. EURGBP has already retraced half of its move lower since last week’s MPC minutes, and is now substantially less over stretched relative to its fair-value as indicated by STEERs in yesterday’s edition of FX Quant Insight. This limits scope for a further pullback before sterling continues to strengthen. As we wrote in “A Stronger GBP: EURGBP Set to Fall Further” in the current FX Weekly, we recommend using the pullback in GBP as an opportunity to enter short EURGBP positions.
- FOMC to take centre stage today – likely to be USD supportive
The Eurozone war of words between the fiscal hawks and the growing anti-austerity lobby looks likely to intensify, but for today eurozone concerns move out of the spot light. Draghi’s Testimony to the EU Parliament Committee reiterate the latest ECB press conference and provided very little to drive EURUSD. Rather, the focus today will be on the FOMC announcement. The two-day meeting will be followed by the release of growth and inflation forecasts, as well as the first press conference since January. Our economists believe the Fed would like to signal no change in the current policy stance and produce no meaningful changes in financial conditions in either direction. However, the forecasts released after the meetings will likely reflect an increase in core inflation for year-end 2012 and a lower unemployment rate. Recent rhetoric from Fed officials would suggest that hawkish members of the FOMC will raise their projections for the Fed Funds target rate. The changes in the data will likely be interpreted by the markets as less dovish which should keep USDJPY supported, although ahead of next week’s Golden Week holidays, heavy exporter offers ahead of the 82 level will provide a significant obstacle to a move higher. More broadly, incoming US data have been mixed and market tensions have resurfaced since the less dovish March statement; the less emphasis the FOMC places on these later developments, the better the USD will fare and vice versa.
- US durable goods expected to decline; risk of dovish RBNZ Thursday
US durable goods orders are expected to decline 2.7% as Boeing orders fell significantly in March while core capital goods should bounce back. This should be enough to ensure that equipment and software investment makes a small positive contribution to Q1 GDP growth. Meanwhile, late in the NY Wednesday afternoon session (Thursday morning in New Zealand), the RBNZ will announce its rate decision. With NZ PM Key arguing vociferously that NZD is overvalued but at same time ruling out intervention, the onus may be on the central bank to keep NZD in check. Lower NZD rates seem an unlikely prospect, especially given the strength of some of the forward-looking indicators from New Zealand, but with markets pricing in multiple cuts by the RBA, the RBNZ may prefer to err on the dovish side. We like to express this view via our short NZDCAD position entered at 0.8100 on Thursday, targeting 0.7800 in coming weeks.
BNP Paribas