GBP Nears $1.66 on GDP, Yen Hit by S&P Outlook Downgrade

Cable rose over a full figure above $1.6550 in the immediate aftermath of preliminary Q1 GDP from the UK. Yen retreats as S&P remains vigilant on Japan's fiscal imbalances. Fed decision pushed forward as markets brace for the first accompanying press conference by Chairman Bernanke.

UK preliminary Q1 GDP came in at 0.5% on a q/q basis, averting a double-dip recession and reigniting speculation the BOE may soon follow the ECB with a rate hike. While the figure was right in line with consensus, the market was less bullish GBP relative to both EUR and AUD - both have made multi-year highs on the greenback in recent days just as Sterling went nowhere. $1.66 presents the next important resistance as the highest level since late 2009.

Barely a week after warning on the deteriorating fiscal state of the US, S&P sharpened its focus on Japan, cutting its outlook on AA- rating to Negative from Stable. Disruptions to production following the events of the March 11th earthquake are the primary risk to rising deficit, however the move also reflected a lack of urgency by the government in planning for reconstruction. This should only exacerbate the political turmoil facing embattled PM Kan, who continues to lose support within his own party. USD/JPY jumped to 81.90 after the downgrade, paring its earlier losses to April lows below 81.30.

FOMC rate decision takes center stage in the US session, with the timing of the announcement pushed forward to 12:30 ET to make room for Fed Chairman's first accompanying press briefing at 14:15 ET. Aside from the timing change, this decision carries an added weight in that it represents the last meeting before the Fed is forced to decide on the future of QE expiring in June, since no meeting is scheduled for May. Baseline scenario is for QE2 to expire at $600B, paving the way to gradual unwinding of monetary stimulus in months to come. However, minority camps do maintain a market presence on both sides of the spectrum - namely, the Fed may either communicate it can curtail the asset purchase program shy of its final amount or hint it would consider QE3 in the event of slower than anticipated recovery. Any departure from the assessment of commodity-driven inflation being "transitory" would then be perceived as hawkish, while a downgrade of economic assessment being on "firmer footing" would renew speculation for further easing.

Ahead of the Fed decision, one of the more leading economic indicator - durable goods orders - is expected to bounce from prior month's contraction. Late in the US session, RBNZ is widely expected to leave policy rates unchanged at 2.50%.

US earnings season rolls on with more defense names GD and NOC looking to follow strong suit of Lockheed Martin. In energy, HES and COP will follow quarterly results from BP in European session along with Dow Industrials component Boeing.

By GG - AshrafLaidi.com Staff