GDP Down – The Pound Gains Against Euro

Today saw the release of worse-than-expected gross domestic product data showing the UK economy contracted by 0.2 percent in the final quarter of 2011 and signs that the Bank of England is preparing for another round of quantitative easing.

Despite this the pound recouped losses against the euro, after falling to within sight of a near four-week low in early London trade as market players positioned for a weak GDP number. Concerns about the European Central Bank having to write down its Greek bond holdings as part of a deal to avoid a disorderly default also weighed on the single currency.

Bank of England minutes from the last policy meeting, released at the same time, showed members voted unanimously to keep total asset purchases at 275 billion pounds, although the minutes also said a further expansion of asset purchasing was “likely” to be required.

Market players said sterling was oversold against the euro on some concerns of an even weaker GDP number. The fact that no BoE policymakers voted for an increase in QE this month – even though it is strongly expected in February – also lent some short-term support to the pound.

“There were a couple of calls of minus 0.7 percent from a couple of forecasters which maybe spooked people. There was definitely some chat of weaker numbers ahead (of the data) so I think that’s why we’ve seen a bit of a bounce, combined with the minutes not guaranteeing any extension of QE,” said Adrian Schmidt, currency strategist at Lloyds Bank.

There was little reaction in sterling to a CBI industrial trends survey that showed British factory orders shrank in January, though at a lower pace than forecast.