As you all learned in the Fundamental Analysis section of the uber-awesome BabyPips.com School of Pipsology, a country’s economic standing plays a crucial role in determining exchange rates. One of the easiest ways to gauge economic performance is by looking at the country’s gross domestic product (GDP).
If you took your time away from the charts last week to wait in line to get your new white iPhone 4, boy did you miss out a lot on the GDP reports! But don’t worry, Forex Gump is here to fill you in on the details!
As I cited in my preview last week, the U.K. GDP report did cause fireworks on the charts as pound bulls went loco like Will and Kate fans did when the couple kissed! The actual figure came in as expected at 0.5% after growth contracted by the same amount in Q4 2010.
Digging deeper into the report, I found out that the manufacturing and services sectors contributed the most to growth. Manufacturing activity reportedly increased by another 1.1% during the first quarter of 2011, matching its pace in Q4 2010. Meanwhile, services output grew by 0.9% and erased the 0.6% decline we saw in the last three months of 2010.
From what I’ve heard, economic hotshots aren’t keeping their hopes up for the U.K. growth either. With the effects of the coalition government’s austerity measures expected to kick in full-swing soon, consumer spending will probably be muted in the coming months. But who knows, maybe the Duke and Duchess of Cambridge can auction off some of their wedding stuff and get the Britons loosening their purse strings to bid!
Across the Atlantic, the advance U.S. GDP report for the first quarter of 2011 came in at 1.8%, following the 3.8% uptick we saw in Q4 2010. Analysts had expected a slowdown in economic growth, but the actual figure came in 0.1% shy of the consensus.
I’m sure Americans won’t let this rain down on their parade especially after the news of Osama Bin Laden’s death. But let’s take a look at the details of the report, shall we?
Market junkies attribute the disappointing reading to construction activity dropping like a rock during the quarter. Data showed that non-residential investments declined by a whopping 21.7% during the period after printing a 4.0% uptick in Q4 2010. Also, the 5.2% cutback in government spending might have weighed in on the calculation.
On the bright side though, consumption (excluding oil) grew by 2.7% during quarter albeit at a slower pace than the 4.0% increase we saw in the previous quarter.
A few economic gurus are slightly optimistic about the report as they point to improvements in the U.S. labor market. However, they caution that high oil prices, plans of fiscal consolidation, and a weak housing market would take a toll on the economy.
The Canadian economy reportedly shrank by 0.2% in February, which was worse than the expected flat reading for the month. The slump in manufacturing, transportation, and wholesale trade were mostly to blame for this disappointing figure.
However, the Loonie didn’t seem to have gotten flustered over this GDP report. After all, Canada reports its GDP on a monthly basis, which probably means that the 0.2% contraction was just a tiny bump along the road. Besides, Canada enjoyed 0.5% growth in January, which is more than enough to offset the 0.2% downtick for February. This should be enough to keep real GDP growth around 3.5-3.8% for the first quarter of this year, stronger than the 3.3% quarterly expansion seen in the last quarter of 2010.
Don’t expect everything to go smooth sailing though. Several international risks, such as weaker demand from the U.S. and Japan, could dampen Canada’s future growth. On top of that, higher commodity prices could become a burden for Canadian consumers and possibly put a dent on spending and overall growth. With that, economic hotshots are estimating that annual GDP growth could slow to 2.5-2.7% for the rest of 2011.
Well, that wraps up my GDP roundup! I sure hope this will help you with your fundamental analysis because, at the end of the day, it’s all about pairing a strong currency with a weak one. Let your fellow traders know which currency you’re rooting for by voting in our poll below.