UK economy shrinks by -0.7% in Q2

- Sterling falls sharply
- NZ cash rate steady at 2.5%

Researchers have discovered that birds – in this case Eurasian jays – are as bright as seven-year-old children. They learn to raise the level of water in a pot by dropping in pebbles and can distinguish one object from another. What a pity, then, that seven-year-olds or Eurasian jays were not available yesterday evening at Hampden Park. Organisers were unable to distinguish between the flags of North Korea (predominantly red with a star) and South Korea (predominantly white with a circle). Instead of looking it up, as a jay or a child might have done, they just bunged up the first one that came to hand and the North Korean football team walked off the pitch in protest.

Earlier in the day the Office for National Statistics had hoisted a different sort of red flag, this one signifying dangerous waters for sterling. The first ONS estimate of second quarter gross national product was appreciably lower than expected at -0.7%. That makes a shrinkage of -0.8% in the year to June and means the country's economic output has fallen by -4.5% from its peak in early 2008.

Understandably, the pound moved lower on the news. It plunged an instant half cent and more against the euro and the US dollar. Less easy to understand is why it mostly avoided further punishment. Yes, it starts this morning lower on every front but its net loss on the day is about 20 ticks against the dollar and only half that against the yen. These are the sort of movements that would normally go unnoticed.

Sterling did less well against the euro, where it is a cent lower than Wednesday's opening level. Investors were actually buying the euro. In part it was a greater relaxation about Spanish regional governments; they are apparently not all facing imminent bankruptcy. There was also a positive reaction to comments by Ewald Nowotny, head of the Austrian central bank. He advocated giving the European Stability Mechanism a banking licence, thereby allowing it to increase the leverage of its capital. Putting two and two together to make five, investors decided that the European Central Bank would get in on the act next week, doing all sort of wonderful things to prop up Spanish government bonds and save the euro.

Sterling's biggest loss was the two and three quarter cents it gave up to the New Zealand dollar. The pound was already on the retreat as a result of the poor GDP figure when the Reserve Bank of New Zealand announced it would be leaving its benchmark interest rate steady at 2.5%.

There is not very much on today's agenda to get the currency juices flowing. Gfk's index of German consumer confidence is already out, almost unchanged at 5.9. German import prices, Italian retail sales and Euroland money supply are of little importance to the euro. US pending home sales and weekly jobless claims tend not to affect the dollar. The only data that might make a difference are US durable goods orders. Investors are forecasting a 0.4% monthly increase, thereby almost guaranteeing that the actual figure will be anything but 0.4%.

The lack of forceful data today could mean investors devoting more thought to yesterday's rubbish GDP figure. If they do, it is hard to imagine them coming up with more reasons to buy the pound.