Pound Strength Hinges on GDP Report, FOMC Threatens Euro and Yen

Talking Points

• British Pound Looks to Q1 GDP Report to Fuel Continued Advance
• FOMC Outcome Likely to be Supportive for US Dollar vs Euro, Yen
• Australian Dollar to Underperform Comm Bloc on Upbeat Fed Tone

UK Gross Domestic Product figures headline the economic calendar in European hours. Expectations call for output to rise 0.1 percent in the three months through March after shrinking in the fourth quarter, avoiding the onset of a technical recession. The probability of such an outcome has been enhanced by an equivalent reading on a closely-watched private sector estimate from NIESR, a London-based consultancy.

Validation of a return to growth is likely to offer further support to front-end UK bond yields – the leading driver of price action at the moment – reinforcing diminishing QE expectations and pushing the British Pound higher. Data from Credit Suisse suggests priced-in bets on additional BOE stimulus moderated after last week’s surprisingly hawkish BOE meeting minutes and strong set of good economic data (CPI, jobs, retail sales), helping Sterling outperform the spectrum of major currencies. Needless to say a downside surprise would go a long way toward deflating the currency’s momentum.

Later in the session, all eyes turn to the Federal Reserve monetary policy announcement. As we detail in our weekly fundamental trends monitor, the path of least resistance seems to favor no changes in the overall policy mix. The market-moving component of the outing is likely to be found in an updated roundup of forecasts for interest rates and key economic performance metrics from FOMC members. Traders will be particularly keen to see if any policymakers now expect rates to rise earlier than the official late-2014 time frame. Bernanke’s post-announcement press conference may likewise spark volatility in the event that any of the Chairman’s remarks catch the markets off-guard.

On balance, the revelation of a comparatively optimistic Fed is likely to see the US Dollar rise against currencies where the yield outlook is materially less robust, particularly the Japanese Yen (where USDJPY continues to track 10-year Treasury yields).The Euro is also likely to renew its drive lower, although correlation studies point a stalemate between rates expectations and risk trends as drivers of price action, meaning directional momentum may be somewhat subdued.

The implications of an upbeat FOMC for growth-linked currencies are a bit mixed in that a stronger US recovery would be supportive for risk appetite. We suspect the Canadian and New Zealand Dollar will broadly hold recent ranges as receding fears of further USD dilution clash with moderation in global slowdown fears.By contrast, the Australian Dollar is likely to find itself under pressure however as rate cut expectations build in the wake of a dismal first-quarter CPI print.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

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