EU session review: Pound slides after UK growth shock

Data released:
07:45     France     Consumer spending (December)    0.6%    0.3%    2.8%
07:45     France     Consumer spending (December) Y/Y     0.4%    0.5%    1.5%
09:30     UK     GDP (Q4) preliminary    -0.5%    0.4%    0.7%
09:30     UK     GDP (Q4) preliminary Y/Y     1.7%    2.6%    2.7%
09:30     UK     PSNCR (December), bln    25.5    17.0    16.8
09:30     UK     PSNB (December), bln    16.8    18.1    23.3
12:00     Canada     CPI (December)    0.0%    0.1%    0.1%
12:00     Canada     CPI (December) Y/Y    2.4%    2.5%    2.0%
12:00     Canada     CPI core (December)    -0.3%    -0.1%    0.0%
12:00     Canada     CPI core (December) Y/Y    1.5%    1.6%    1.4%

Sterling tumbled on Tuesday as a surprise contraction in fourth-quarter UK GDP raised fears over a double-dip recession and doused expectations that the Bank of England would raise interest rates to fight inflationary pressures in the British economy.
Figures showed the UK economy shrunk 0.5% in the last three months of 2010, far worse than expectations for growth of 0.5%.
Howard Archer at IHS Global Insight said it was a stunningly bad outcome, far worse than even the most pessimistic of forecasts. He said even allowing for a very substantial hit to economic activity from December’s severe weather, the news was extremely disappointing and worrying.
“This weakness cannot be put down only to the weather,” said Mr Archer. “The data add major support to the argument that the Bank of England should keep interest rates down at 0.5% despite current elevated inflation levels.”
Analysts said the news raised serious concerns that the UK economy was in a strong enough position to withstand the coming fiscal tightening.
The pound, which last week hit a two-month high of $1.6059 after a sharp rise in consumer price inflation raised expectations that the Bank would raise interest rates, suffered its worst fall in a month.

EUR/USD fell from $1.3688 to  $1.3578 before recovered to $1.3620.

GBP/USD fell more than 200 points from $1.5970 to the lows around $1.5750.

USD/JPY holds within Y82.25/54.

US data starts at 1355GMT with the weekly Redbook, which is followed at 1400GMT by the latest S&P/Case-Shiller Home Price Index.