World First Morning Update - Sterling Carries On Despite GDP Slippage: April 26, 2012

On a day in which a month’s worth of rain was due to fall it is oddly fitting that the UK has slipped back into a technical recession for the first time since the 1970s. The much-feared fall in construction (-3.0%) seems to have been the main factor and thoughts will now turn to the Bank of England and whether further QE is warranted. Mervyn King has already warned that Q2’s figure is likely to be poor given the extra bank holiday as a result of the Queen’s Jubilee and we know that business surveys slipped, although not into negativity, so revisions going forward are likely to make interesting viewing..

Sterling took one in the teeth as a result, selling off across the board in the aftermath although gilt yields have also slipped on the basis that more QE may be forthcoming, and not, as George Osborne would have you believe as a result of the UK being anymore of a safe haven than it was a month ago. The pound rallied back after the announcement as it became clear that the market trusts the business surveys from the first quarter instead of the government’s estimates. We’ll have to wait a month to see if that faith is well founded.

Last night’s FOMC meeting was a bit of a non-event as most had expected given the expectation timeline around further asset purchases. The Fed did upgrade its growth forecasts for the year while expecting that unemployment will also fall off through 2012. It seems that we are seeing more of a split within the committee as to when interest rates will be increased stateside with only 4 of the 10 members believing that rates will stay low until 2014 compared with 6 in January.

The dollar has slipped overnight however, after the Chairman assured the press during the post-decision conference that they were “prepared to do more” which has been interpreted as a hint towards further asset purchases.

Europe was relatively quiet today but politics will take the stage today as the Dutch government, or what is left if it, try and get a budget away before the EU’s deadline at the end of May. EUR has remained strong despite the news over the previous week and we expect EURUSD to remain in this sideways grind through the rest of the month. Bank earnings from Europe (BBVA, Santander, Deutsche) have, on balance, been ok and this has helped reduced the risk premium a tad in the past few sessions. Today’s German inflation number due at 13.00 is the most important EU release of the day; expectations sit at 2.0%.

Despite the general fears over the UK economy, consumer confidence has bounced back to its highest since June ’11. Respondents have attributed this to the decrease in inflation that we saw at the beginning of the year but, as we all know, this is unlikely to continue its pace and therefore confidence could have reached a near-term high. In the meantime, it has helped sterling kick further on versus the dollar overnight.

Last night’s RBNZ meeting was also a bit of a non-event as they decided to keep rates at 2.5% as a result of the recent strength of the NZ dollar despite falls in commodity prices. NZDUSD is 0.6% higher on the day so far.