Sterling Soared On GDP, ECB Rate Decision Watched

The sterling ended the week as the strongest performer; the UK Q1 GDP beat expectations, and the economy avoided the so-called triple dip recession. The Swiss franc was the worst performer, driven by the strong rebound in EUR/CHF, but we'd caution that such rebound has lost much steam towards the end. The dollar and euro were both weak. The greenback was weighed down by the extended rebound in gold, as well as weaker than expected Q1 GDP report. Meanwhile, Euro was pressured by weak economic data and expectation of rate cut from ECB. Nonetheless, price actions in EUR/USD were rather indecisive. The yen's recent consolidation extended with selloffs seen in yen crosses on Friday, after the BoJ stood pat. The New Zealand dollar was given a brief boost by RBNZ statement by paring much gain towards the end.

Technically, we'll once more maintain our view that yen crosses are bounded in consolidation pattern, and should have started the third leg last week. Secondly, the Sterling's strength was rather impressive as the GBP/USD resumed its recent rebound from 1.4830, and is probably heading to 1.57/8 level. The EUR/GBP also breached recent support at 0.8410 to resume the fall from 0.8806. Thirdly, our strategy of shorting the AUD/USD didn't yield results, as the fall was contained at 1.0220 and the pair turned sideways. However, outlook for the AUD/USD stays bearish with 1.0358 minor resistance intact. Fourth, development in the USD/CAD suggests that recent correction from 1.0341 is still in progress for another low under1.0083.

For near term trades, we'd favor the GBP/USD long and the EUR/GBP short this week, but we'd keep it short term as the current moves are viewed as corrective. The main focus this week could be on going long on yen crosses for medium term trades. Based on current momentum, the GBP/JPY is favored.

Economic data from the U.S. saw Q1 GDP rose 2.5% annualized in Q1 versus expectation of 3.0%. That's notably better than Q4's 0.4%. The price index rose 1.2%, also below the expectation of 1.4%. Headline durables dropped -5.7% in March, versus expectations of -2.8%. Ex-transport orders also dropped -1.4% versus consensus of 0.5% growth. A number of key important economic data will be released by the U.S. this week, including ISMs and NFPs. These will be closely watched by the markets.

Eurozone PMI manufacturing dropped to 46.5 versus expectation of 46.8, while services PMI rose less than expected to 46.6. French PMI manufacturing and services improved to 44.4 and 44.1 respectively, but remained dismal. German PMIs were the bigger disappointment today, as PMI manufacturing dropped to 47.9 while services PMI dropped below 50 to 49.2, versus expectation of 49 and 51.1 respectively. Markit chief economist Williamson noted that "the survey is signaling a worrying weakness in the economy at the start of the second quarter, with signs that the downturn is more likely to intensify in coming months rather than ease." The German Ifo business climate dropped for the second month to 104.4 in April, and missed the consensus of 106.5. Current assessment gauge dropped to 107.2 versus expectation of 109.4. Expectations gauge dropped to 101.6 versus consensus of 103.2. Some analysts expect that recent weak data from Germany, including PMIs, should have some implications for the ECB on its policies.

The U.K. avoided the so called triple dip recession. More importantly, the 0.3% qoq growth in Q1 GDP was indeed stronger than expectation of 0.1%. GDP rose 0.6% from last year. Total services gained 0.6% qoq following a contraction of -0.1% in the previous quarter, while transport and communication services rose 1.4%. Concerning other areas, business and financial services increased 0.2%, distribution and hospitality services rose gained 1.1% and government services gained 0.5%. The data lifted some pressure on the BoE to expand the asset purchase program. The MPC has been split with outgoing governor King, and two other members voted for expansion in prior meetings. The BoE announced an expansion of its Funding for Lending Scheme to help small businesses. The program will now last until January 2015. Current BoE governor King said that the FLS revamp will give banks "continued assurance against the risk that market funding rates increase, especially in the light of continued uncertainty in the euro area," and will "help to maintain easier funding conditions for banks into 2015, and thereby help to support credit conditions and the recovery."


At the BOJ meeting in April, policymakers left monetary measures unchanged. The policy rate was maintained at virtually zero, and asset purchases stayed at an annual pace of 60- 70 trillion yen. The central bank, however, upgraded the economic outlook aggressively with economy expected to start picking up by the middle of this year. While differentiated on the inflation outlook, policymakers were unanimous in voting to leave the quantitative and qualitative measures unchanged at the meeting. The central bank also revised up its growth and inflation forecast. GDP is projected to grow 2.9% in 2013/14 fiscal year, up from the prior forecast of 2.3%. Core CPI is expected to rise 0.7% versus prior the 0.4% forecast. For 2014/15 fiscal yea,r growth is expected to be at 1.4% versus prior projection of 0.8%. Core CPI is expected to rise 1.4% versus prior projection of 0.9%. Inflation is expected to be at 1.9% at the end of 2015/16 fiscal year, close to BoJ's 2% target.

Australian CPI rose 0.4% qoq in Q1 and accelerated to 2.5% yoy. However, that was below expectation of 0.7% qoq, 2.8% yoy. The RBA trimmed mean CPI has indeed moderated to 2.2% yoy, even though the weighted mean CPI rose more than expected to 2.6% yoy. Overall, the data suggested there is scope for further policy easing from RBA should economy loose momentum. Markets are pricing in over 40% chance of rate cut by the central bank in May to boost non-mining activities.

The RBNZ left the policy rate unchanged at 2.5%. The accompanying statement was more upbeat than the previous one, given more encouraging GDP and confidence data. Policymakers acknowledged that domestic economic growth has picked up, and reconstruction work in Canterbury has gained momentum. The central bank is expected to leave the OCR unchanged through the end of the year. The RBNZ stated that NZD has remained "overvalued and is higher than projected in March", and this was partly driven by the accommodative policy by the Bank of Japan. Policymakers stated that "the high New Zealand dollar continues to be a significant headwind for the tradables sector, restricting export earnings and encouraging demand for imports". Concerning inflation, the central bank expected it to remain benign, "close to the bottom of the target range this year". Inflation will "gradually rise towards the 2 percent target midpoint" beyond this year. More in RBNZ Left OCR unchanged and more upbeat on the economic outlook.