The UK economy is officially back in recession and sterling immediately sank on the news as investors re-examined the likelihood of more Bank of England quantitative easing although the pound’s fall was somewhat muted by the Federal Reserve’s policy announcement. The Fed upgraded its growth estimates, and the message weighed heavily on the dollar, allowing the pound and other so-called riskier currencies to recover earlier losses. Sterling hit fresh seven-month highs fuelled by talk the Fed is slowly leaning towards another round of monetary stimulus as US data continue to miss forecasts. The euro is relatively unchanged from with concerns about French politics nullifying the single currency’s rise alongside risky stocks and currencies.

Sterling

Britain unexpectedly slipped back into recession after initial growth estimates published confirmed the economy shrank. immediately fell in response with traders reconsidering the possibility of another shot of monetary stimulus coming from the Bank of England to ensure a return to growth. However, despite the pound’s gloomy outlook, the currency managed to close the session still in touch with recent record highs against its main rivals after eurozone political developments and the Federal Reserve’s dovish policy outlook helped splinter the markets focus on economic woes.

US dollar

The Federal Reserve upgraded its growth and unemployment forecasts after concluding its two-day monetary policy meeting, giving markets some relief following days of speculation the Fed would sound more cautious over the economic outlook in light of recent data. However, Fed Chairman Ben Bernanke again repeated that additional bond buying will remain as an option in order to maintain growth and inflation targets whilst the central bank predicted in its quarterly forecast that interest rates will stay near zero at least until late-2014.

Euro

The euro moved to three-week highs against the broadly weaker US dollar after the Federal Reserve reaffirmed its pledge to hold borrowing costs near zero for an extended period and use more asset purchases if necessary to maintain economic growth. The euro also benefited somewhat from negative growth data from the economy that helped put a stop on the pound’s surge in recent weeks.

Japanese yen

The yen is looking vulnerable as investors grow nervous before the Bank of Japan monetary policy announcement with most analysts expecting policy makers to sanction yet another increase in the central bank’s asset purchasing programme. As a result, the safe haven yen failed to garner much support in spite of more concerns about Europe’s political and fiscal health as well as negative growth data.

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