STERLING GUTTED BY GDP DISAPPOINTMENT

• UK economy shrank by -0.5% in the fourth quarter of 2010
• RBA expected to hold interest rates steady at 4.75% this week

Sterling fell by three cents on Monday and Tuesday before bottoming out on Wednesday and climbing all the way back. Friday was another down day and the pound spent the weekend consolidating. It opened in London this morning a cent and a half lower on the week.

Without doubt the week's most important event was Tuesday's figures for gross domestic product (GDP) in the fourth quarter of 2010. GDP is, as its name suggests, the total of a country's output; the market value of all goods and services produced within its borders. Its rise and fall measures the performance of the economy as a whole. In the first three quarters of the year GDP grew by 0.3%, 1.1% and 0.7%. In the fourth quarter it was supposed to have grown by 0.5%. But it didn't. It shrank by -0.5%, not at all the required outcome. The Office for National Statistics blamed the contraction on December's arctic weather; the wrong sort of snow, if you like. Investors were not impressed by the explanation and moved out of sterling while they considered their next move.

They found their inspiration the following when the Bank of England published the minutes of January's Monetary Policy Committee (MPC) meeting. For several months there had been a 1-7-1 voting split: Adam Posen wanted to increase the size of the asset purchase stimulus package, Andrew Sentance wanted to raise the Bank Rate by 25 basis points and six of their peers sided with the boss in support of the status quo. That distribution changed in January with Martin Weale joining Mr Sentance to vote for a rate increase. Although the MPC's deliberations in early January had been overtaken by the weak GDP number, investors were heartened to see that there was a greater inclination towards tighter monetary policy and higher sterling interest rates.

The Australia Day holiday on Wednesday meant it was a low-key week in Australian financial markets. Preceding the day off were two inflation measures. Producer prices rose more quickly in the fourth quarter; by 0.1% as opposed to the 1.3% rise in Q3. Consumer price index inflation was softer too, down from a quarterly 0.7% to 0.4% that put the annual rate of inflation at 2.7%.

Nothing as meaty as the GDP figures appears on sterling's agenda this week but there are some challenges for it to face. Purchasing managers' indices for the manufacturing and services sectors ought to show that the UK economy is doing better in Q1 2011 than it did in Q4 2010. Nationwide and Halifax house price indices will almost inevitably show that the residential property market isn't. It will be a busier week for Australian data, with the performance of manufacturing and services indices, the government's house price index, new home sales, building permits and the trade balance. On Thursday the Reserve Bank of Australia announces its monetary policy decision. Most analysts confidently expect the cash rate to remain at 4.75%.

In the absence of any trend, and at the risk of being boring, our advice remains unchanged for another week.