Sterling Trading Higher After GDP Data as All Eyes Turn To Bernanke

The pound is the best performer on the day after the Q1 GDP data while the yen is down. All this leads up to the US interest rate announcement and the inaugural Fed press conference with Chairman Ben Bernanke to follow.

 

Following the release of UK Q1 GDP numbers the pound traded higher with sterling the best performing currency so far today. The release was in line with market expectations of 0.5% and stands in stark contrast to the Q4 2010 numbers that showed the UK economy contracted by -0.5%. The GBP/USD jumped higher to 1.6580 before trading back to 1.6550. A rebound in UK growth should support sterling in the short term and a GBP/USD target still remains at the 2009 high of 1.7040. Support comes in today at 1.6420 near the upper channel line from the consolidation pattern of late last week.

 

The yen is on its back foot across the board as recent gains in the Japanese currency are being unrolled. The cause of today’s JPY declines is the S&P cut to the sovereign rating outlook due to increased costs from the earthquake and tsunami. The rising cleanup and recovery costs do not come as a surprise, but nevertheless the announcement by S&P helped to trigger a yen reversal. Recent yen strength has been apparent since mid-April after traders who were long on the JPY have recovered from the hit they took following the unilateral intervention to weaken the JPY. The USD/JPY is trading higher at 82.30 and the momentum of today’s move could carry the pair higher to the 83.00 level.

 

All eyes now turn to the Federal Reserve as today will mark the first quarterly news conference by the Fed Chairman. Prior to the press conference the Fed Funds Rate will be released and no changes are expected. This mantra goes as well for the QEII program as most Fed watchers forecast the US central bank to carry out the full $600B of bond purchases. The accompanying FOMC statement may indicate a slight improvement in the US economy as growth looks to have picked up and inflationary pressures have increased but are still below a level that would prompt any withdrawal of the loose monetary policy that helps to support the economic recovery.

 

Volatility in the dollar may increase given the new Q&A session Bernanke will endeavor upon. He should face questions not only pertaining to monetary policy and unemployment rates but also the weakness in the dollar will likely be addressed. The new format may not increase transparency into the Fed’s future actions but market volatility should be increased.

Russell Glaser

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.