Poor UK GDP figures and gloomy King send sterling tumbling

Tom Tong26/Jan/2011Currency Updates

GDP

Sterling tumbled to a two-and-a-half month low against the euro on Tuesday as a shock contraction in the UK economy caused investors to scale back expectations for interest rates rises in coming months.

Britain’s economy shrank 0.5 percent in the last three months of 2010, confounding forecasts for a 0.5 percent expansion and prompting warnings of a tough 2011.

The pound ended up dropping at least one percent against all major currencies as investors reassessed the view that high inflation would force an early Bank of England rate hike

On Tuesday evening sterling was also weighed down by comments from the Bank of England Governor Mervyn King. King stated inflation is likely to rise towards the 4-5% level while any interest rate hike will be based upon longer term goals.

USD

The dollar remained at near a 10-week low against a basket of currencies on Wednesday as the market continues to look for confirmation from the Federal Reserve that its focus remains on supporting growth.

The perception that the Fed will keep a much easier policy than the European Central Bank, which is growing worried about inflation, has helped the euro to extend its recovery after a two-month drubbing from worries over Eurozone debt.

The dollar weakened broadly, largely due to falling bond yields making dollar denominated assets less attractive.

EUR

The euro climbed to a 2 high month against the US dollar and a 10 week high versus the pound during Tuesday trading.

The euro was boosted following on from weak GDP figures released in the UK and partially benefited due to the European Financial Stability Facility’s (EFSF) inaugural debt issue. The order book for the issue closed with bids valued at 43 billion euros for the 5 billion euros of paper on offer, and speculation the new issue would be massively oversubscribed boosted the euro in early trade.

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Written by Tom Tong

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