UK Back In Recession
The pound came under pressure versus both the euro and dollar after the Q1 GDP print confirmed that the UK is back in recession. The headline number came in at -0.2% versus consensus estimates of +0.1%. The decline was driven by the construction sector (albeit a small contributor towards the UK economy) which declined the most since Q1 2009. The data is hard to reconcile with the leading indicator data and a recovery in PMI readings from the more important services sector. Our UK economist believes that positive revisions in services and construction are very likely. This view is shared by the British Chamber of Commerce who stated that “Business surveys, including the BCC’s quarterly economic survey, have shown a more positive picture, and we believe these give a more accurate indication of the underlying trends in the economy,” following the release. Long GBP has been a favoured trade in recent weeks so the negative data surprise saw a sharp move lower versus the USD and EUR. We retain our moderately bullish forecast versus the euro however, and believe that there is greater underlying strength in the UK economy than the GDP data suggests. Indeed the forward looking CBI business optimism indicator rebounded to 22 in April. USDJPY moved lower in Europe ahead of tonight’s Fed policy announcements. There are three FOMC-related events to watch out for. The policy statement will be published first, but our US economists doubt the Fed will alter its view that “economic conditions…are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.” Ninety minutes later the quarterly forecasts may show some modest upward revisions to inflation and growth projections, and some Fed officials may even forecast an earlier start to policy normalization. Fifteen minutes after that Chairman Bernanke’s press conference begins, where he is tasked with presenting the FOMC’s opinion and not his own view in particular. We do not expect him to signal additional easing is on the way – whether through additional balance sheet expansion or through an extension of ‘Operation Twist’ beyond the June deadline. USDJPY is likely to be very sensitive to the outcome but we think upside risks for the pair still dominate – especially with the BoJ likely to ease further still on Friday. We stick to our 3m USDJPY target of 85.00. The FOMC aside, we expect the RBNZ’s policy meeting to be largely a non-event for the New Zealand dollar.
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