Full-force of UK GDP Yet to be Realised?

Sterling fell heavily, across a broad basket of currencies yesterday after one of the biggest shocks in the economic downturn crippled the pound.

The UK economy contracted by 0.5% in the final three months of last year , marking the first fall in output in output since Q3 2009.

Market that had been expecting growth of 0.4%, with the unusually bad weather held largely responsible for the contraction.

The data will increase the focus on this morning’s release of the minutes of the January Bank of England’s policy meeting. However the market appears to be already revising its interest rate expectations following the GDP release.

Sterling’s collapse versus the euro stalled somewhat because the single currency also eased back versus the dollar from two month highs seen earlier in the week.

However the Euro recovered over the course of the day, breaking through the $1.37 level versus the US Dollar overnight. The dollar has also fallen back versus the yen with markets turning their attentions towards this evening’s policy announcement from the Fed., with central bank expected to be dovish in tone.

As this article is being written, sterling has risen against the dollar and the euro, while gilt futures fell after minutes from the January meeting of the MPC showed policymakers considered a rate rise.

The minutes showed Bank of England policymaker Martin Weale unexpectedly joined Andrew Sentence in voting for a quarter-point rate rise this month.

Against the dollar, sterling rose to a session high of $1.587 after the announcement, and rose to 1.1590 versus the euro.

The weight of the negative GDP data will no doubt set the tone over the coming days, with many market analysts predicting prices below the €1.12 level and $1.50.

We will wait and see what transpires, but caution is advised for any sterling sellers.