A dreadful day for Sterling as GDP is very disappointing

The Sterling had by far it's worst day of the year on the foreign currency exchange market, falling over three cents against the Australian dollar and over two cents against the Euro and US Dollar. The catalyst was the first estimate for fourth quarter 2010 UK GDP.

Economists were expecting the UK economy to grow by around around 0.5%, a forecast that turned out to be wildly off target. The advance estimate came out to show that the UK economy actually shrunk by -0.5%, disappointing the market as forecasts were expected to show only a slight slowing from +0.7% in Q3. The announcement saw investors sell Sterling in hurry despite politicians' attempts to blame the fall on December's snow. 

The knife was twisted into Sterling by Bank of England Governor Mervyn King during a speech on the MPC's stance on inflation. The gist of the speech was familiar: higher interest rates in Britain cannot bring down the price of oil or stop the chancellor raising the rate of VAT and reduce inflation. It was chilling to hear the Governor say; "I see trouble ahead", "further pain", "worst pay squeeze since 1920s", "standard of living to plunge" and so on. In essence, if you think your family finances are bad now, just wait. Thank you Mr. King.

Such was the focus on Sterling, the remainder of yesterday's data had little effect. Even a seven-point jump in US consumer confidence did nothing. 

There are two central bank policy decisions this evening from the US Federal Reserve and the Reserve Bank of New Zealand. Neither is expected to result in any change to interest rates.

Sterling's ambition will be to survive the minutes of the January MPC meeting. In the light of the governor's speech last night it is hard to imagine the minutes will reveal a groundswell of opinion in favour of higher interest rates. Against the background of the Q4 "growth" figure it is even harder to see a rate increase on the horizon.