UK Final GDP Unlikely To Be Sterling's Salvation

Market Brief

It was a quiet day in the FX space yesterday, with German CPI releases forming the entirety of the data releases during our session. The overall reading came in at -0.4% M/M (vs. +0.2% expected) but came as little surprise to the market, as regional figures released earlier all posted lower than forecast changes on the month. More influential were comments from ECB's Trichet in the afternoon who stated that a strong USD is 'extremely important'. The 30bp dip lower in EURUSD failed to gain much traction as improved risk appetite gradually ground back the advantage, EURUSD was confined to a 100bp range for most of the day (currently 1.4630). Most focus was instead turned to EURCHF which continues to hover around the 1.5100 level. We are looking to add to longs below the figure, and hope to exploit SNB intervention to weaken the CHF around these levels.

After equities in Europe and the US ended strongly higher yesterday, overnight Asian indices rebounded across the board from Monday's sell-off. The DXY has remained stable (76.85) despite the slight improvement in risk appetite, and commodities are largely flat or very modestly higher (gold $992, silver $16.25). Japanese CPI data highlighted national inflation is -2.2% Y/Y, but the figures were in line with forecasts and, as is common with Japanese data releases, had very little FX impact.

Today the spotlight is on the UK as we await the final Q2 GDP reading along with mortgage approvals, consumer credit, and M4 money supply. GDP is expected to be revised upwards (Q/Q -0.6% exp, -0.7% prior), and whilst improvements in the UK data may force a squeeze higher in GBPUSD, rallies should be capped under 1.6110 (currently 1.5905), and our bias is that downside surprises form the greater risk to GBP going forward as other major economies exit the recession and look to pull away from accommodative monetary policy.

Elsewhere, expect Eurozone Retail PMI (47.1 prior), Eurozone Consumer Confidence (-21 exp, -22 prior), and US Consumer Confidence - expected to post a small improvement in Sep to 57.0 from 54.1 last month.