It’s official - the UK is out of recession and the economy is growing…just!

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Putting aside the US and European debt issues, the markets were able to focus on the estimate for second quarter GDP from the UK yesterday. The actual figure of 0.2% was as the market expected however, the statisticians at the Office of National Statistics stated that GDP growth would have been 0.5% stronger had it not been for factors that adversely affected the quarter (namely the extra bank holidays and the Japanese earthquake effecting supplies).

At the same time as the GDP figure was released, the May index of services demonstrated the downturn in the services sector in April was reversed. The news killed doubts that the services sector, which is by far the largest sector within the UK economy, would drag the UK back into recession.

Sterling rose on the back of these releases which confirmed the UK is out of recession and showed that growth is still possible, despite the negative events impacting on growth. Sterling did well against the US Dollar as uncertainty continues over whether the US congress will reach a compromise on the debt ceiling by Monday, as Sterling hit a 7-week high at £/$ 1.6429.

Despite the consequences of a credit rating downgrade and the urgency of the situation, the markets seem to be maintaining the belief that Washington will reach an eleventh-hour agreement to prevent the US going into default.

The gold-medal currency at the moment is the Australian Dollar which has set new record highs against the US Dollar and Sterling (or record low from a Sterling v Australian Dollar perspective). The Aussie Dollar jumped a cent higher after CPI figures showed inflation accelerated from 3.3% to 3.6% which signalled a reversal in sentiment towards the Aussie Dollar. It was thought that the Reserve Bank of Australia would keep interest rates at 4.75% this year as the economy seemed to be losing momentum but following the increase in CPI it seems inflation really has moved higher so analysts are once again looking for a rate increase before Christmas. 

Today's data calendar see German inflation, Eurozone money supply and US durable goods orders. The only piece of UK data is the CBI's industrial trends survey of manufacturers' order books. This evening the Federal Reserve publishes its Beige Book survey of national economic conditions, and tonight the Reserve Bank of New Zealand is expected to keep interest rates at 2.5%.

As well as the data, all eyes will be on the Washington budget disagreement and the US Dollar given the harshness the credit ratings agencies have treated Greece. Whether they have got the conviction to hand out the same sort of punishment to US Government bonds remains to be seen.