Pound Remains Supported As U.K. GDP Revised Higher, But Downside Risks Remain

DailyFx · August 28, 2009, 6:50am

The pound built upon its recent gains on the back of an improved second quarter GDP reading reaching as high as 1.6340. The second reading of growth was revised higher to -0.7 from -0.8% as private consumption and government spending were stronger than initially estimated.

[B]Talking Points
• Japanese Yen: Under Pressure As Risk Appetite Continues
• Pound: U.K. GDP Revised Higher
• Euro: Economic Confidence Surges
• US Dollar: Personal Income, Spending on Tap

[/B][U][B]Pound Remains Supported As U.K. GDP Revised Higher, But Downside Risks Remain[/B][/U]

The pound built upon its recent gains on the back of an improved second quarter GDP reading reaching as high as 1.6340. The second reading of growth was revised higher to -0.7 from -0.8% as private consumption and government spending were stronger than initially estimated. This was reflected in the improvement in the index of services to -0.6% from -1.0%. However, we saw consumer confidence hold steady at -25 according to the Gfk survey which missed estimates of -24. This could raise concerns as consumers may be reluctant to return to their normal spending habits if they remained concern over future growth.

The GDP figures also raised some concerns as we saw exports decline from -1.6% to -2.7% and gross fixed capital spending shrink to -4.5% from -3.8%. Although both components saw significant improvements from the first quarter the lack of demand from abroad and investment in new projects should continue to keep labor markets depressed and consumers retrenched. Therefore, we could see the improvement in consumption levels flattened going forward which could limit the scope of a U.K. economic recovery. Any upside potential for the pound may be limited by these concerns. We still see potential for the GBP/USD to test 1.600 and beyond as the head & shoulder’s formation unfolds. A break above resistance at 1.6459 the 50-Day SMA could change our bias.

The Euro spent the majority of the overnight session consolidating its gains from yesterday despite a jump in Euro-Zone economic confidence to 80.6 from 76.0. Growth in the second quarter from the region’s largest economies Germany and France has raised hopes that they could lift the region out of its current recession. A sharp improvement in the service sector from -18 to -11 made the biggest contribution to the incr4ased optimism. A slight rise in consumer confidence to -22 from -23 was a positive but it missed estimate s of -21which could fuel concerns that consumers remain shell shocked from the credit crisis and will continue to curb spending until they see stronger evidence of a recovery. The EURUSD’s failed test of 1.4400 could be a sign that the pair may remain range bound between 1.4000-1.4500 and a test of the lower bound may be ahead.

The U.S. dollar has firmed after yesterday’s sell off when we saw investors cast aside doubts that a recovery was unsustainable and continued to feed their appetite for risky assets. The consistent improvement in fundamental data globally has led investors to increase their bets, which continues to lead to dollar weakness as they exit the safe haven of U.S. Treasury bonds. Equity markets remain supported in Asian and European trading and with U.S. futures pointing toward a higher open we could see dollar weakness resume. Expected positive readings in personal income and spending of 0.1% and 0.2% respectively should continue to feed optimism. Indeed, rising stock markets have started to lift the hopes of the consumer which have been weighed by labor market concerns. The final University of Michigan consumer confidence reading for August is expected to be revised higher to 64.0 from 63.2.

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