Currency watch: Sterling hangs on first quarter GDP

It has not been a good week for the pound. With the recent data pointing to the UK economy remaining shackled by high inflation and growing at a feeble rate, I doubt sterling could fight its way out of a wet paper bag at the moment.

We received confirmation on Wednesday that UK Q4 GDP fell by 0.5% in the fourth quarter and it is rapidly becoming clear that the preliminary figure from the first quarter will be the release that makes or breaks sterling’s year.
 
On this number it is very likely that we will see the Bank of England make its interest rate rise decision sooner rather than later if the preliminary figure from the first quarter is a good one.

A May interest rate increase looks increasingly likely if that is the case. However, if the figure is a poor one, August is the next stop.
 
The predominant view is that we will see a rate rise from the Europeans (although the logic to this escapes us) and that the Bank of England will hold at 0.5% as it has for the past 2 years.

This and only this is the reason that the euro is so strong versus its crosses. Should we see the European Central Bank vacillate in its decision making process then we would expect to see some big euro weakness.

If they do hike, however, then what happens to the PIGS could be quite horrific.

Jeremy Cook, chief economist at World First foreign exchange, 01.04.2011