The main story overnight was the putrid 4th quarter GDP release from the UK. Expectations were that the economy is getting ready to cool as the government puts through austerity measures meant to help re-align the government's books.
Coming into the overnight release, forecasts had the economy growing 0.5% in the 4th quarter compared to the 3rd quarter. Instead the data showed that the UK economy shrank by 0.5% on the quarter, and grew by 1.7% growth on a year-on-year basis, against expectations of 2.6%
Here's a look at UK GDP over the past 5 years.
The news undercuts any strength the GBP and following a sideways channel the past few sessions we broke below an important support pivot at 1.5850.
Market participants were pricing in higher inflation and the prospect of the BOE becoming more hawkish as a result. Some had the BOE raising rates as early as this summer as the annual CPI hit 3.7% last week. Now, the attention will squarely fall on a sputtering economy, that will only come under more strain as more austerity measures are undertaken. The weak GDP data will also make it less likely that the BOE will be taking the decision to hike rates.
The GBP/USD should now stick in a $1.55 to $1.60 range, and we may see the rally from mid-January cut down to size. The first projection following our break of support is a channel breakout projection to the 1.56 area.
We saw very strong sell-offs in other GBP crosses including EUR/GBP, GBP/JPY, and GBP/ CHF .