GBP Awaits UK Prelim GDP, USD Extends Weakness

Sterling in focus ahead of Q2 GDP release as concerns about growth start to weigh, Obama speech sinks the US dollar as US debt ceiling wrangling continues, Swiss franc and gold continue to rise.

For quite some time now the UK chancellors austerity plans have attracted criticism from across the political divide as being too far and too fast, with economists like ex MPC member David Blanchflower claiming that the current governments fiscal policy is a mistake. Notwithstanding the fact that both the OECD and the IMF have broadly backed the plans the recent weakness in economic data has raised the spectre of the possibility that the latest Q2 growth figure could slip into negative territory.

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The usual excuses are already being prepared in the event of a poor number, from the extended Easter break due to the Royal Wedding, to the pinch on consumer spending caused by rising inflationary pressures.

Expectations are for growth in Q2 to rise by 0.2%, less than half of Q1s 0.5% rise, but still in positive territory. Despite the recent volatile nature of the recent retail sales data, recent PMI data suggests that even though growth has been slowing it is just about holding onto positive territory.

Even if growth is on the weak side the Chancellor will still be able to point to the UKs low borrowing costs relative to what is currently going on in Europe and the political wrangling in the US over the raising of the debt ceiling.

Nevertheless a poor GDP number will raise concerns that the UK may not be able to get its deficit down in the timeline originally planned and as such send borrowing costs up on fears that the government may relax the purse strings in an attempt to court popular opinion.

In the US the political wrangling between Democrats and Republicans continues over the raising of the debt ceiling and the uncertainty created by this could well adversely affect this afternoons consumer confidence number for July. Last nights speech by President Obama underlined the fact that the parties remained as far apart as ever, with the two parties putting forward two separate fiscal plans. The Republicans are looking to implement a two step approach in order that they can raise the issue prior to the Presidential re-election campaign in 2012. The Democrat plan seeks to raise the debt ceiling until after the 2012 election in an attempt to alleviate the concerns of the credit ratings agencies who have more or less indicated that the US will lose its AAA rating unless a credible deficit reduction plan is implemented in the coming months.

As a result of the uncertainty the Swiss franc and gold have continued to make record highs against the US dollar and look likely to continue to do so while the current uncertainty prevails.