Pound Sunk By Biggest GDP Contraction Since 1958, After Reaching Highest Level Since October

he pound would set a fresh yearly high of 1.6746 before the final reading of 1Q GDP showed the lowest quarterly growth since 1958 of -2.4% down from -1.9%. The steeper than expected contraction dragged the annualized reading to -4.9% versus expectations of -4.3%. Total business investment in the country fell by 7.9% which was the most since September dimming the prospects for future growth. Meanwhile, Nationwide LLC showed that house prices rose 0.9% in June which helped support earlier bullish sentiment. However, the weak growth figures has the GBP/USD testing 1.6600The BoE’s success in their bond purchase program continues to raise optimism for the U.K. economy. The central banks aggressiveness in their monetary policy to start the year is starting to pay dividends which continue to provide sterling support. Our contention that we may be seeing the pound become overvalued was supported by the weak growth numbers including a 1.3% drop in household spending and exports falling for a fourth quarter by 6.9%. However, with the GBP/USD reaching its highest level since last October there is very little in the form of resistance until 1.6888-50.0% Fibo of 2.0160-1.3504. Euro bulls have regained control after a brief sell off following weak money supply figures and German unemployment reaching 8.3%-the highest since June 2007. Although, we saw a 31,000 increase in the number of unemployed Germans it was less than the 45,000 that economists were expecting. The Euro-zone June CPI-estimate also printed better than expected at -0.1% versus -0.2% which will help the ECB keep rates at 1.00% as they maintain their price stability focus. Policy members have consistently maintained that rates are appropriate and unless we see the risks of deflation substantially increase a bottom may be in place at the current record low. Bollinger band resistance at 1.4207 may limit upside potential fro EUR/USD.The dollar has started to regain its footing after rising oil prices and higher equity prices kept it under pressure during Asian trading. Slow growth and rising unemployment in Europe is weighing on risk appetite and could lead to dollar support heading into U.S. trading. However, the expected rise in consumer confidence to 55.3 from 54.9, which would be the highest since September 2008, could fuel demand for risky assets. Additionally, Chicago PMI is forecasted to rise to 39.0 from 34.9 as manufacturing steadily improves which will raise expectations for domestic growth and future employment. Therefore, we could see the greenback trade lower on increased optimism and increased risk appetite. However, the S&P Case-Shiller house price data is also ahead and weakness in the housing market could dim the outlook for a recovery.


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posted by srikanth....july 1