The Pound rallied across the board yesterday after the preliminary 3rd quarter GDP figures showed the UK economy grew twice as much as initial forecasts.

Sterling came under heavy selling pressure on Monday falling to a near 7 month low versus the Euro on speculation that the 3rd quarter GDP estimate would produce a weak figure, thus increasing the likelihood of further quantitative easing measures from the Bank of England.

Growth was expected to fall back to 0.4% but the figures released yesterday morning estimated the UK economy grew by an impressive 0.8%. Although this is below the 1.2% growth we witnessed in the previous quarter, it is worth noting that last quarter’s figure marked the fastest pace of growth in nine years.

The reading which came in well above consensus looks to strengthen Sterling, which gained an entire percent versus a basket of currencies in the London trading session.

The positive GDP figures should go some way in reassuring investors that the UK economy is strong enough to withstand the budget cuts and continue to grow.

The prospect of further quantitative easing from the Bank of England has caused many traders to short sell the Pound. Providing the UK can continue to produce strong economic figures, the prospect of further “QE” diminishes.

Sterling received a further boost in the afternoon when credit ratings agency Standard & Poor’s revised its outlook on the UK economy from “negative” to “stable” while maintaining its triple A credit rating, citing the government’s Spending Review as the reason behind the change. The news may help to lift the “bearish” view market participants have taken on the Pound in recent weeks.

Sterling’s gains could be short lived however as many economists fear that George Osborne’s austerity measures (which will lead to 490,000 job losses in the public sector) could derail the recovery and place the UK in the dreaded double dip scenario.

Sterling sellers may look to capitalise on the recent gains as outlook for the UK economy remains fairly pessimistic.

Daily insight by Alex Middleton of UK Currency Exchange Broker TorFX.