Forex Gump's  Instablog

Earlier this week, it was confirmed that the U.K. had escaped a triple-dip recession in Q1 2013. The economy expanded by 0.3% in a quarter that was only anticipated to deliver a growth of 0.1%.

Truth be told, expectations were set pretty low for this report, as the markets had good reason to believe that the economy had contracted further in Q1. As I had mentioned in the past, harsh weather, downgrades from credit rating agencies, and downbeat economic reports all pointed to another recession for the U.K.

In fact, even BOE member Martin Weale himself warned the markets that the economy was at risk of posting negative growth, so you can imagine the markets' surprise when they saw that the economy had grown at a pace three times faster than forecast.

Looking at the details, we see that the services sector contributed the most to growth last quarter. Britons were busy spending their dough in hotels and restaurants, which caused services to expand by 0.6% in Q1 2013.

Likewise, industrial production was up 0.2% thanks to a 3.2% rise in mining and quarrying. Unfortunately, the same can't be said about the construction industry, which got hit with a 2.5% decline.

But what does this 0.3% growth mean really for the U.K.? Is it cause for celebration? Well, if you ask me, it's a good start but it's still far from impressive.

Many will be quick to point out that the U.K. practically erased the 0.3% contraction recorded in Q4 2012, not to mention avoided another recession with last quarter's growth. Yes, it is relieving to know that the economy is still growing, but what they may fail to realize is that the U.K.'s output is still 2.6% below Q1 2008 levels.

Take note, the U.S., Canada, and Germany, are already producing output above their pre-recession levels. This tells us that despite the unexpected growth in Q1 2013, the U.K. is still lagging behind other major economies.

Now, that's not to say the pound won't see its fair share of gains over the coming days. After all, just one look at GBP/USD shows us how glad the markets were to see the latest GDP report. Within seconds of the release, price found itself over 100 pips higher.

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The way I see it, the Q1 2013 GDP report should give the central bank a bit of breathing room and soften calls for the BOE to expand its asset purchase program.

Furthermore, I imagine that BOE Governor Mervyn King will have a harder time finding other policymakers to join him, David Miles, and Paul Fisher in voting for further easing. So all in all, this will probably provide GBP/USD with a bit of support, at least for the time being.

In November 2011, the technocrat Mario Monti came into office as Prime Minister when the scandal-laden Silvio Berlusconi finally stepped down. Monti did a good job in restoring Italy's credibility to financial markets, however, he failed to rally enough political support to keep him in his post.

His tenure ended in December of last year, when Berlusconi's party withdrew its support and consequently, forced Monti to resign.

General elections were held last February in an effort for Italy to form a new government. However, the outcome became inconclusive and the country has been left without any leader... That is, until now.

Last week, Italian President Giorgio Napolitano extended his term as Italy's president. Usually, the president's role is mostly ceremonial. But in times of crises, such as the one which the country is in, he has the power to nominate a Prime Minister. Among a handful of contenders, he picked the leader of the Democratic Party, Enrico Letta.

At only 46 years of age, Enrico Letta is about to become the youngest prime minister in the country since 1987. His political experience includes being the leader of the Democratic Party and serving in secretarial and ministerial roles for research and non-government organizations.

It turns out he's used to being one of the youngest in the bunch as he became Cabinet Minister in 1998 at a young age of 32, the youngest ever in Italian post-war politics.

There's also no denying that Letta shares close ties with former Prime Minister Berlusconi. Letta's uncle, Gianni Letta, has acted as a behind-the-scenes negotiator for the infamous bad boy of the Italian politics.

Some think that it is good that he is close to Berlusconi as it would be easier to rally their parties on important decisions. We already saw this when Bersani resigned as leader of the Democratic Party, Letta took over and voted with Berlusconi, the leader of the People of Liberty, in order to keep Napolitano in office as Italy's two biggest political blocs tried to form a coalition.

Of course, there are members of Letta's party that aren't too happy about his ties with Berlusconi. Unless he's able to gain their support, he could be in for a tough ride in terms of securing enough backing for his leadership.

In addition, some are skeptical that Letta will taint the credibility that Mario Monti established for Italy. After all, Monti has set the bar high and has received strong praises for his strict implementation of budget reforms. Letta has already expressed his intention to steer Italy away from heavy austerity and focus more on boosting employment and business activity.

For now though, markets don't seem too concerned about the potential impact of Letta's leadership on the Italian debt situation or the overall economy. Finally being able to find a new leader for the country is already good news for the euro, as Italy was able to end two months of political stalemate. Heck, a finally finding a Prime Minister is better than no Prime Minister, right?

Yesterday, the Australian Bureau of Statistics released the Q1 2013 Consumer Price Index (CPI). It showed that the average price of consumer goods and services climbed 0.4% during the first quarter, which was roughly half the 0.7% increase the market had initially expected.

Meanwhile, the Trimmed Mean CPI--the version that excludes the 30% most volatile items in its computation--printed only a 0.3% rise, which is the slowest growth reported in 14 years. Annualized, the inflation rate now stands at 2.5%, lower than the consensus forecast of 2.8%. The weak inflation figures add fuel to the growing calls for an RBA rate cut.

If you recall, the RBA has said in the past that it has enough scope to ease. To a certain extent, the central bank does have reason to do so, due to Australia's deteriorating fundamentals.

For example, Australia's labor market isn't performing so well. Though Australia enjoys an unemployment rate that other countries would kill to have, at 5.6%, it's quite a bit higher than what Australians are used to. The unemployment has been climbing steadily since mid-2012, back when joblessness fell as low as 4.9%.

Resource investment, which supported the country's robust growth in recent years, has been showing signs of peaking as companies have been cutting back on their investments and spending. Without this key contributor to growth, Australia will need to find another bright spot to fill the void and lift the economy.

With the addition of weaker than expected inflation, it certainly seems as though the RBA has legroom to finally give the markets the rate cut that they have been waiting so anxiously for.

But will the RBA bite the bullet?

Of course, having the luxury of lower-than-expected inflation isn't necessarily enough to get the RBA to act.

Though there are signs of weakness in the Australian economy, it isn't exactly gasping for air. Just take a look at the latest consumer spending stats.

Retail sales have been showing an unexpectedly strong rebound so far this year, and analysts are attributing this growth to the RBA's previous rate cuts. January posted a growth of 0.9%, which is more than double the forecasted figure, while February sales surged by a whopping 1.3% to surpass the measly 0.3% growth that many had predicted.

Clearly, the central bank's previous rate cuts are still working their magic, and it's likely that policymakers will want to see just how far these cuts will take the economy before they decide to slash rates once again.

After all, cutting rates comes at a risk. Allow me to explain, my fellow forex fanatics!

One of the reasons the Aussie has been so strong is because of Australia's high interest rates. As we learned from the School of Pipsology, when a country has high interest rates, it usually attracts investors, resulting in a stronger currency.

If the RBA decides to continue with slashing its cash rate, it would strip the Aussie of this key appeal, which could weaken it. In turn, this could lead inflation to soar back up and give the RBA a headache.

I guess what I'm saying is that an ill-timed rate cut could end up doing more bad than good, so in my opinion, it's best for the RBA to adopt the wait-and-see approach and sit on the sidelines until it gets more confirmation of economic weakness.