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The first reading of Q1 GDP for the UK is released this morning at 09.30 and, for the pound, the scene is set for a make or a break. This number obviously follows the disappointing -0.5% figure in Q4 of last year and analysts are looking for a decent lump of growth to offset that fall and push things forward. Ideally we are looking for something around 0.7-0.8% although the median analyst expectation is of 0.5% growth. This would likely see GBP slip in trade as it shows that, to a certain extent, the economy has been stagnant for the best part of 6 months. It is obvious that any disappointing number would also cause set back the time table of probable interest rate hikes further hurting GBP’s prospects.

The markets were fairly quiet yesterday with the dollar and the pound the main losers with the buck lower on central banks diversifying their reserves away from the dollar and into the euro. USD’s also seemed to be sold on the uncertainty surrounding the Fed decision and press conference later today. It feels obvious that the Federal Reserve will continue its QE2 program until closure I.e. Use all $600bn it set aside for the purpose but the key question is what comes next? The markets see it more likely that monetary policy will remain loose after the facility ends and hence the weaker dollar.

The euro however is loving life at the moment as it remains unhindered by the problems in its periphery with investors continuing to bet it higher. Central banks have played their part by selling USD as we have noted above but there was some good news as well in the form of a decent bond auction from the Spanish. Spain sold $2.0bn in 3m and 6m bills, within the EUR1.5-2.5bn target range, and demand was strong. The yields were higher on both issuances however this was counteracted by strong demand as well. Further evidence of Spain decoupling from the rest of periphery will only keep euro further bid in the short term.

S&P have still got their downgrading hat on it looks like as Japan’s outlook was cut to negative as the credit agency worried over the cost of rebuilding after the terrible earthquake in March. S&P was also the agency that downgraded Japan in January to AA-.

Latest exchange rates at time of writing