European Open Dollar holds firm GBP rises ahead of UK retail sales

UK fourth quarter GDP shocked investors today by posting a contraction in growth to -0.5% a full 1% worse than the market had expected and this sent the pound sterling and the FTSE 100 sharply lower. As soon as the GDP figure came in we saw investors move quickly to sell out the pound sterling, which fell over 1% against the US Dollar, and risky asset classes such as mining equities which in turn forced the FTSE 100 lower by as much as 0.8% in a matter of minutes.

It has been one of those days today where investors have been clinging to any sentiment that may help shape market direction. The shockingly bad UK GDP number have firmly grabbed the headlines but in truth in the same breath disappointing earnings from Johnson and Johnson in the US and a stellar rise in US consumer confidence has made trading rather difficult and directionless.

GDP contraction is a shock to the system
The GDP figure is quite simply a shock to the system and heightens fears that the coalition governments’ austerity plan may well curb growth too excessively and send the UK into a double dip recession.

Today’s Q4 GDP reading creates a huge problem for the Bank of England in their attempt to curtail spiralling inflation which hit 3.7% last month as it lessens any room for flexibility on hiking rates earlier than possible. Perversely therefore, home owners may look upon today’s GDP reading with some positivity.

That said, let’s not get too far ahead of ourselves with this contraction in fourth quarter GDP just yet. This is only a preliminary reading and is liable to change next month, given the public admission of the difficulty the ONS had in attaining the number, whilst this may also tell more of a story about how the harsh weather over December affected business activity than of one about declining core strength in the UK economy. This view is reinforced by the Office of National Statistics who said that the bad weather contributed to most or all of the quarterly fall.

Naturally the afternoon’s session has been dominated by the surprise contraction in UK Q4 GDP but earnings from the US that underperformed market expectations have not helped matters. Johnson and Johnson is one of the more standout names disappointing the market today by reporting that fourth quarter earnings fell to $1.9bn, worse than the market had expected.

That said, a bigger than expected jump in US consumer confidence has helped to curtail some of the damage to sentiment that has arisen from the UK GDP number, with US consumer confidence now at its highest rate since May last year, hitting 60.6.