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GDP data for the first quarter of this year was worse than expected and fell by 0.2% vs. the 0.1% expansion that was expected. As we mentioned in our preview yesterday, the construction sector was a major drag on growth declining by 3% in the quarter, after declining by 0.2% in Q4 2011. This is concerning since the UK winter was fairly mild, which is usually good for the construction sector.
Industrial and manufacturing production was also weaker, falling by 0.4% last quarter, although this was an improvement from the 1.3% decline in Q4. The services sector expanded by 0.1%; however this was not enough to balance the weakness from other sectors of the economy.
The BOE has said it believes that the GDP figures are underestimating the strength of the UK economy and there is a chance that the figures could be revised higher. However, there is no denying that this data is very disappointing. Due to the Queen's Jubilee bank holiday in June, the growth picture is likely to remain cloudy in the UK until the rest of the year.
We still don't believe there will be any more QE at the BOE's next meeting in May, however, we don't think the Bank can afford to be too complacent as growth continues to be lacklustre and inflation pressures are stickier then expected. All eyes are now on the Inflation Report and the next BOE meeting next month. But we could see the market scale back their expectations of a hawkish BOE, which may weigh on some GBP crosses.
What this means for sterling:
The pound had an immediate knee-jerk lurch lower versus its major crosses after the GDP release. It fell below 1.61, 1.6060 is now key support. Since the pound's recent strength was fuelled by expectations of a hawkish BOE, the disappointing Q1 growth data could weigh on the pound fairly heavily and 1.6160 (the 61.8% Fib resistance level and high from November 2011) could be a double top.
EURGBP is back above 0.82, although this pair is likely to remain range-bound due to on-going Eurozone tensions. We spoke about GBPAUD yesterday. This pair has also given back some gains although 1.5550 then 1.5500 should act as support. We continue to believe that the RBA is more dovish than the BOE so we could see a slow grind higher in this pair if we can break back above 1.5625 - a key resistance level and 61.8% Fib retracement from the October 2011 highs to the Feb 2012 lows.
Kathleen Brooks| Research Director UK EMEA | FOREX.com
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