Weak UK GDP sets scene for further QE
It is also worth noting that this is the first estimate of GDP, at -0.2% will no doubt be subject to significant revision, while Europe's problems are well documented.
The risks to the upside on inflation are set to come from rising oil prices due to rising tensions in the Middle East and also from firms looking to increase margins, especially with the Olympics and the Diamond Jubilee coming up.
It remains likely that inflation will continue its recent downward path with last year's VAT rise due to drop out in the January figures and the fall in energy prices also set to filter through in February.
Even with those falls it is by no means certain that prices will fall back below the 2% level as indicated by Mervyn King, given that even the core inflation rate still remains above the 3% level.
Judging by recent comments by Mervyn King in a speech in Brighton last night he appears to be in the Posen camp with respect to further QE, with the likelihood that further asset purchases will be on the agenda at the February meeting.
Given that an extra £75bn was added to the economy in October and the economy still slipped back, it could be argued as to the effectiveness of the delivery mechanism of the extra asset purchases. This then lends itself to ask how much more effective will any extra QE be.
This can be mainly put down to the problems in Europe and irrespective of the measures taken by the central bank we could well see further sterling gains against the euro.
The pound is currently pushing against a range of resistance levels above the 1.5610 level which could well limit further upside. Today's slide lower could well signal a bearish daily reversal on the candlestick charts and signal a retest of the 1.5240 lows earlier this month. Certainly a close around the 1.5550 level could well signal a move back towards the January lows at 1.5240, but we would need to see a close around these levels in NY today.
This evening's FOMC press conference could well play a factor in the future direction of the cable especially if the Fed pushes out its low rates policy beyond 2013, which could result in some short term US dollar weakness.
Report by Michael Hewson, market analyst, CMC Markets