Negative Q1 GDP Growth in UK Weighs on GBP; FTSE 100 Hovers above 5220 Support

High yielding currencies were lower during the last few sessions, propelled in part by disappointing growth figures out of the UK. First quarter GDP numbers in the UK were lower than market expectations (largely on weakness seen in the construction sector). This brought sellers into the British Pound as analysts will ramp up their arguments now for why the Bank of England (BoE) is likely to re-introduce their quantitative easing program (in the form of government bond buys).

The Q1 GDP numbers came in at -0.3 percent (which follows the -0.2 percent drop that was registered previously, as output in the construction sector dropped by a massive 4.8 percent (estimates were calling for a drop of -3 percent). Going forward, additional monetary stimulus from the BoE will depend on the progress that is made in the Eurozone and any possible credit defaults in Greece. Most analysts are forecasting another negative GDP performance in the second quarter for the UK, with the country returning to positive productivity levels in the third quarter.

Looking at the specific effects seen in currency markets, the British Pound (GBP) was weaker against most of its counterparts, falling below 1.57 against the US Dollar and below 80 against the Euro. The next directional wave in the EUR/GBP could prove to be one of the more interesting moves in the forex markets, with one of two main possibilities likely to take place. One is that the situation in Greece continues to stall in progress (the main Euro negative), while the other is that GDP growth in Germany continues to remain supportive and surpass the growth data seen in the UK. GDP numbers out of Germany were positive by 0.5 percent for the first quarter in 2011, with the export sector the main source of economic strength.

The outlook in Germany is not all positive, however, with weakness still seen in the country’s IFO Business Confidence surveys and this is adding to the weakness that is seen in both manufacturing and services industries across the Eurozone as a whole. Ahead today, markets will be watching US macro data, with Durable Goods Orders and weekly Jobless Claims scheduled for release. Durable Goods are expected to show some improvements but still remain in negative territory at -0.5 percent. Jobless Claims are expected to see a small uptick to 377,000 for the week.

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