httpvh://www.youtube.com/watch?v=Q-sJDYg1Ljc

The gap between the Republicans and the Democrats appears to be impossible to close at the moment after yet another of day of Capitol Hill wrangling that has got us nowhere. Both President Obama and House Speaker John Boehner made addresses yesterday calling for a consensus. Obama called for a “balanced approach” to cutting deficits, urging members on both sides of the aisle to get something done before August 2nd. Boehner spoke later and emphasised that he and Republicans had put in a “sincere effort” to work with the President, in the face of some blaming him of obfuscation. He also stated that the Republicans were not going to give “a blank cheque”.

This hit the dollar overnight, putting it to new all time lows against the Swiss franc and pushing EURUSD above the 1.45 mark and cable up past 1.6350. The euro is once again resurgent and the pound is looking a little wobbly before the release of UK GDP at 09.30.

The consensus view sits at an increase of 0.2% following what has been, to all intents and purposes, a stagnant period through Q4 2010 and Q1 2011. While this is disappointing growth, it is still growth but will not be enough to satisfy those who believe that the government is currently on the wrong course and that a deficit reduction plan is causing unnecessary pain. Our view is that the flatness will continue and we are looking a figure of 0.0%. This will of course give sterling a bit of a kicking on the markets and so we would recommend that anyone who is a seller of GBP that the prices in a few hours time will likely be lower than they are at the moment.

Even if the release is worse than expected we do not foresee the government changing its position on the deficit as, to do so, would draw considerable ire from the markets. Someone referred to George Osborne as the “bond markets’ poster boy” yesterday and while I believe that to be strong it is certainly true that nobody has seriously talked about a potential downgrade of the UK’s credit rating since the days of the hung parliament. This has been expressed in the price of UK debt with the yield on our 10 year gilt retreating back towards the 3% level; a market justification of a certain degree of security. These things can change quickly and dramatically however so caution is advised.

The one thing that it will perpetuate is the belief that an interest rate rise from the Bank of England will be pushed further into the future. We are at the front end of the expectations curve with our proposal of a February rate rise with some in the market looking as far out as August.

Other than GDP the market’s eyes will be very much on the US consumer confidence measure due at 15.00. Confidence in the US has hit the skids since March and the bun-fight in Washington will do nothing to secure any feeling that the economy is recovering. This could see further risk off flows after yesterday’s equity market losses and may slow the US dollar’s decline.

Latest exchange rates at time of writing