What Does GDP Mean for the BOE?
Q1 GDP data surprised to the upside when it was released earlier this morning. The quarterly GDP figure rose 0.3% in Q1, compared with Q4 2012. By far the largest contribution to growth came from the services sector, which saw GDP increase by 0.6% over the quarter. Production also saw a small upward increase. The production sector was boosted by a sharp rise in mining and quarrying, which rose by 3.2%. This sector performed poorly in Q4 2012 as a result of extended maintenance to the North Sea oil fields, thus Q1 was boosted by production coming back online.
Interestingly, snow fall and bad weather only had a limited impact on GDP, according to the ONS. Although it reduced retail output in January and March, it also boosted demand for electricity and gas, which helped to increase output in energy supplies.
But let's not get too excited, the ONS also points out that growth has been broadly flat in the last 18 months, so we are not exactly hitting GDP out of the ball park.
The market reaction has been as expected - a sharp move higher in GBP, interestingly, the FTSE 100 is close to the lows of the day post the report and is testing 6,410. Below here support lies at 6,380 - the 50-day sma. The reaction in the FTSE 100 could be due to a few factors: 1, some mixed Q1 earnings data and 2, expectations that the BOE could delay QE now that the economy has avoided its narrow miss with economic apocalypse.
The GDP data is subject to revision, as this is just the first reading. Right now the sector most at risk from a downward revision is the retail sector due to the impact of bad weather; March retail sales ex auto fuel fell a larger than expected 0.8% over the month.
In terms of the UK's growth mix, services led the way, which is no surprise and follows the stronger services sector PMI, which rose to its highest level since September 2012 in March. Of note, the boost to production from North Sea oil fields may only be temporary. February and March manufacturing PMI data slumped into negative territory. Thus, production could be a weak link for growth going forward. QE may be shelved at the May meeting, but we think it remains on the table for August.
Elsewhere, the market has been fairly quiet today as we lead up to US initial jobless claims and a raft of ECB speakers later today. The focus may also shift to Japan later today as we wait for tomorrow's BOJ meeting (the second one of the month) and also CPI data for March.
USDJPY - a coiled spring?
USDJPY is just about clinging onto the 99.00 level, after BOJ Governor Kuroda testified in Parliament and said that the banknote rule suspension, to allow for the enormous QE programme the BOJ announced earlier this month, is only temporary. This raised questions about how long the QE programme will go on for. We doubt this will dramatically alter the direction of USDJPY (bias is still higher in our view,) since QE has to end at some stage, although we believe that will be far out into the future for Japan. The dips in USDJPY have been shallow; buyers are coming in at 99.00, which suggests to us that we could explode through 100.00 in the near term, especially since we have seen a pick-up in volatility in this cross in recent days. A dovish Kuroda at tomorrow's press conference, tomorrow at 0730 BST, could do it.
Markets ignore Spanish woes
The EUR has shrugged off extremely weak labour market data for Q1, the unemployment rate surged to 27.16% from 26.02% in Q4 2012. Obviously the economic tragedy in Spain is not of that much interest to FX traders right now. EUR is moving higher with overall bullish sentiment in the FX market. EURUSD is testing a crucial level at 1.3065 - the base of the daily cloud. Above here is a bullish development for this cross and opens the way to 1.3210 highs from earlier this month. Interestingly, the markets are testing some key levels this week after moving sideways for most of April. We could see some lively activity in the next few days and major levels in some of the key crosses. FX could be where the action is!
Are the gold bugs coming back?
Stocks aren't joining the party today and we have seen a mixed performance from the major indices. Not even the better than expected GDP could perk up the FTSE 100, below 6.420- opens the way to 6,380- the 50-day sma and a key support level. Gold has climbed today and is above the key $1,430 resistance level and 38.2% retracement of the sharp decline earlier this month. $1,455 - the 590% retracement of that down-move could thwart the gold bugs in the near term. Above here opens the way to a more full-bodied recovery potentially back to $1,500.The drivers of gold in the last 24 hours seems to have been weak US economic data.
One to Watch: GBPUSD
- Sharp moves in major GBP crosses including EURGBP, GBPJPY and GBPUSD.
- GBPUSD broke above the top of the recent highs at 1.5420 after the shock GDP release. The next key resistance level of note is 1.5505 - the top of the daily cloud - see chart below.
- GBPUSD is in overbought territory in the short term (hourly RSI), which suggests that the bulls may take a breather at 1.5410-20. If they get their stride back, 1.5505 (see above) is key resistance ahead.
- EURGBP fell sharply and is now testing key support at 0.8445 - 100-day sma (on the close). Below here is a bearish development for this cross, however key support lies at 0.8400 - the bottom of the 2013 range, which may thwart any down move in the short term.
Figure 1: GBPUSD Ichimoku cloud