Pound Finds Support After Expected Decline in GDP, Dollar At Risk As U.S. AAA Rating

DailyFx · May 22, 2009, 6:00am

The Pound has started to push higher following the inline GDP print which showed a -1.9% decline in growth for the first quarter and -4.1% on an annualized basis . The GBP/USD is back over 1.5840 after falling to as low as 1.5756 ahead of the report.

[B]Talking Points
• Japanese Yen: BoJ Raises Outlook Fro Economy
• Pound: GDP Declines 4.1% in First Quarter
• Euro: Italian Retail Sales Decline
• US Dollar: U.S. AAA Rating Under Question

[/B][U][B]Pound Finds Support After Expected Decline in GDP, Dollar At Risk As U.S. AAA Rating in Question.[/B][/U]

The Pound has started to push higher following the inline GDP print which showed a -1.9% decline in growth for the first quarter and -4.1% on an annualized basis . The GBP/USD is back over 1.5840 after falling to as low as 1.5756 ahead of the report. The growth report showed that private consumption fell by 1.2% along with a 6.1% slide in exports which leaves very little sources of growth for the economy supporting the BoE’s contention that it is headed for a protracted recovery.

The fact that the current downturn hasn’t accelerated as the first quarter contraction is equal to the last three months ending 2008 may add to prevailing sterling strength. However, the decline of household consumption along with a 3.8% drop in private investment will hinder any growth prospects which may start to see cable bears re-emerge. A test of 1.600 is still very likely with major resistance at 1.6036-the 38.2% Fibo of the 2.0160-1.3503 decline. A failed test of the technical level could set up the pair for a retracement.

The Euro has started to see sideways price action after reaching as high as 1.3980 as the only fundamental data to cross the wires was Italian retail sales. Consumer demand rose 0.1% from February but decline by 5.2% for the same period a year ago. The growth picture in the region has started to improve as we saw the ZEW survey signal that optimism is improving. Monday’s German IFO report will be the major event risk of the day with the U.S. and U.K. on holiday which could lead to traders starting to hedge against it today. The expected improvement should equal Euro strength so we may see continued support for the single currency today. .

The dollar has been mixed overnight after falling to the lowest level in 2009 and we may not get much in the form of volatility in the U.S. session ahead of the Memorial Day Holiday. However, we could see a spike in risk appetite as traders may be weary of heading into the holiday long the market, which could lead to dollar strength. However, after the S&P downgrade of the U.K., concerns that the U.S. AAA rating may come under scrutiny helped fuel the sell off of dollar assets ye. An empty U.S. calendar leaves Canadian retail sales as the biggest event risk for the U.S. session and the expected 0.5% increase in consumption could help add “loonie” support.

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