UK GDP printed a better than forecast 0.8% vs. 0.7% expected and pulled the pound above the 2.0500 level once again in what may prove to be the only market moving event of the day, as both the EZ and US calendars are void of any significant data. The upside surprise in UK GDP numbers was aided by a rebound in the manufacturing sector and a surprising increase in oil extraction, therefore it should be taken with a grain of salt as it may represent a one-off increase.

Although some traders speculated that the stronger performance in the GDP figures may spur the UK central bank to raise rates as early as August, we believe there is very little chance of a BOE hike to 6% at the next MPC meeting. While the UK GDP result was impressive, it was hardly emblematic of an overheating economy and should have very little impact on the UK monetary authorities decision-making process. The market appeared to share that view as the rally in the pound was contained to only 30 points of upside in the aftermath of the release. As we noted yesterday, “the MPC is likely to remain neutral for at least several months forward observing the reaction of the UK economy as it adjusts to the latest rate hike. In short 6% rates may have to wait until the end of 2007.”

One other surprising release of the night came from Switzerland which saw Producer and Import Prices dip unexpectedly to 2.8% yearly pace from 3.2% expected. While 2.8% growth rate still represents material price pressures, the decline was a bit of a shock given the weak franc and higher energy costs during the period. Inflation remains the key variable in determining SNB’s monetary policy for the rest of the year. The primary question facing the market is whether the Swiss central bank will ratchet rates by 50bp at the next meeting, with the possibility of 75bp of total tightening by the end of the year, or whether it will opt for the consensus view of incremental 25bp hikes in both September and December..

Today’s muted price readings spurred traders to continue selling the franc on the assumption that the SNB will not surprise to the upside. However, with buoyant consumer demand, tight labor markets and EUR/CHF cross once again approaching yearly highs at 1.6673, the SNB may choose the ignore the price data and make a pre-emptive move to stem the slide in the franc. Mr. Roth and company have already warned the markets when the cross reached these levels last month. This time they may opt for more substantive policy than mere verbal intervention. Indeed with ECB now rather guarded about the prospects of a September rate hike, and the SNB increasingly uncomfortable with the weakness of the franc, the market may be overestimating the chances of further policy action from the EZ and underpricing the possibility of a more aggressive move from Switzerland.

Boris Schlossberg is a Senior Currency Strategist at FXCM.