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Output gaps

We enter the penultimate trading day of the month, with plenty of data to catch the attention of FX markets. Early on, there are indications on German inflation coming through from 08:00 GMT ahead of the preliminary data this afternoon. Thereafter with have UK GDP data at 08:30 GMT.  In contrast to the dip in US output in Q1 (due tomorrow), UK output is seen rising 0.9%, following 0.7% in the previous quarter. Sterling has already been on the firm side over the past week, pushing just above 1.6850 with resistance seen at 1.6878 ahead of the 1.70 level.  The Bank of England has been keen to extol the virtues of forward guidance and assuring markets that rates are not set to rise anytime soon.  On a strong number, then a break of this aforementioned resistance level could well set up cable for a push to 1.70, not seen since August 2009 and then only briefly.

Generally, the dollar was on the softer side through yesterday, with this cautious tone likely to hold into the output data tomorrow. Month end brings the usual risk of increased volatility as institutional investors re-balance hedges and weightings. Thereafter, the jobs data on Friday is likely to determine the early tone to the dollar in May, which as we mentioned yesterday, has traditionally been a strong month for the dollar in recent years.

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