DJIA bounces off support, risk appetite creeps back.
Upwards UK GDP revision fails to lift cable.

The ability of the DJIA to bounce off technical support, better than expected Japanese January industrial production and retail trade data and perhaps the positive reaction to the India budget allowed a little risk appetite to return this morning. Stock markets are higher across the board and the JPY has given back some of this week's gains. EUR/USD is holding with a 1.3550 to 1.3610 range with EUR buyers still thin on the ground as the market sceptically awaits the next round of news surrounding EMU and in particular the Greek budget. Despite the softening is market fears the cable has been unable to hold onto its session highs.

The headline revision to UK Q4 GDP was better than expected. The news, however, failed to lift the pound. Not only had rumours of a stronger number lifted the pound into the open but the breakdown showed that government spending rose 1.2% q/q. Insofar as fiscal stimulus is set to go into reverse this year, the strength of this component underpins the question over whether the recovery can yet sustain itself. Clearly the risk of double dip recession has not yet been fully averted. Even with the support of government spending, Q4 consumer spending rose a moderate +0.4% q/q in Q4, investment fell a worrying 3.1% q/q. These data highlight the ongoing argument over the risk of a double dip recession if too much austerity is introduced after the general election and the opposing view that a potential funding crisis could result if no austerity is announced. Election jitters are increasingly coming to the fore in the UK. Rumours were circulating this morning of an imminent announcement of an election data (May 6th is widely favoured). These rumours followed the publication of new opinion poll which highlighted the risk of a hung parliament. Coalition governments are common in mainland European but in countries such as Belgium and Italy a history of weak coalitions is associated with the build up of a public debt as such governments can lack the necessary support for structural/budgetary reform. Against this backdrop, cable remains on the back foot though the recent low at USD1.5350 continues to hold. The release of a much weaker than expected Nationwide Feb house price survey -1.0% m/m added to the gloom in the UK.

Australian bank lending rose a healthy +0.4% m/m in Jan, the third consecutive increase. This highlights the health of the Australian domestic economic and underpins the risk that the RBA will hike rates for the fourth time this cycle at next week's policy meeting. AUD/USD has been struggling this year to make more headway given the better tone of the USD. However, GBP/AUD is trading close to its 25 yr year low and further losses are possible. This week's rebound in EUR/AUD may also provide AUD buying opportunities.

The US Q4 GDP revision will be closely watched this afternoon. Canadian Q4 current account data, US existing home sales, Chicago PMI and University of Michigan confidence data are also due.

Jane Foley
Research Director