UK growth, or the lack of it, dominated markets yesterday before a late surge in activity following Angela Merkel’s speech to the World Economic Forum and the Federal Reserve’s latest decision. GBP fought hard after the GDP announcement to tread water above the 1.20 level before a rally in EURUSD through to fresh 5 week highs took GBPEUR back into the mid-1.19s.

On UK GDP it was obvious that the relatively solid numbers from last quarter’s services sector have been completely overawn by falls in the manufacturing and industrial sectors. Manufacturing output fell by 0.9%, in keeping with the purchasing managers surveys that have been showing slight contraction through the end of 2011 while the services sector stayed flat. The High St wasn’t lying. The second factor is that most of the surveys are likely to have come from October which was, according to the PMI indicators, the lowest ebb of the manufacturing cycle in Q4 and improvements were seen later through December.

We think that this is a blip and a double-dip recession in the UK is not on the radar. Preliminary figures are always volatile and the possibility of an upgrade over the coming months is possible. This will however lead to higher unemployment and lower business and consumer confidence in the short-term and further calls from the members of the opposition that the coalition cannot keep cutting as it is.

The Bank of England has also published its latest meeting’s minutes. The MPC said that there had been some positivity in the past month but uncertainty remains. The main headline is that some members of the committee are saying that further QE is likely in the future. We expect a further injection of £75bn in February absent a solution to the Eurozone situation.

Merkel’s speech was viewed by all as an opportunity to lay out a new plan for the Eurozone debt crisis but alas, she flattered to deceive. One commentator said that all we should take from the speech is “no money, never ever ever!”. She stated that “If Germany promises something that cannot be delivered if the markets attack it hard, then Europe would be left with a wide open flank”. She also pleaded for patience with the reform measures taking place in the peripheral nations. German business has less to worry about however after the publication of the German IFO number that showed growing confidence in German company prospects. The current situation measure remained weak however.

The big move came after London traders had left for the day as the FOMC announced that it was prepared to keep rates low until at least late 2014. Equities rallied, treasuries also kicked higher and the dollar tumbled, pushing EURUSD and GBPUSD higher. This will leave the dollar as the funding currency for carry traders when times are good and will probably keep the rick-on/off matrix trading too through the next couple of years.

The data calendar is fairly quiet today with an Italian 2yr auction at 10.00 likely to see some more euro strength. Eyes will remain on Davos as well for any flamethrower speeches and Greece for any signs of movement on the haircut negotiations. Traders will be looking at 1.5725 in GBPUSD as a level to start selling the pair while GBPEUR looks well supported at 1.1930.

Good luck

Latest exchange rates at time of writing