by Adam Solomon
Sterling / Euro and US Dollar
The Pound initially rallied against the majors this morning, up 0.4% versus the Euro and 0.3% against the U.S Dollar, after the Office of National Statistics reported that UK gross domestic product increased 0.5% in the first quarter. The result of the data was in line with expectations but the anaemic pace of the recovery will make it difficult for the Bank of England to raise interest rates before the Autumn and that may weaken the Pound, which is already the third worst performing currency this year.
If GDP increased beyond 0.7% and inflation accelerated in April, the BoE would have the impetus to raise interest rates in May or June. However, the data this morning has provided some relief for Sterling in the very near-term but it is unlikely to last, amid speculation that Europe will raise interest rates again over the Summer, extending the yield advantage by another 25 basis points.
Euro buyers may wish to take advantage of this minor improvement, because investors still anticipate a move towards 1.10 in the short-term. The UK currency has bounced back above 1.65 versus the U.S Dollar this morning and the inherent weakness of the Dollar makes it more likely that the upward move can be sustained.