Daily currency report

The British pound suffered heavily in foreign exchange markets following data showing the UK economy contracted by almost one per cent in the second quarter. Sterling is now at risk from speculative attacks as investors anticipate a potential interest rate cut from the Bank of England while the government may have to put its triple-A rating on the line and also respond. The euro, stock markets and other more risky investments caught a break after a member of the European Central Bank suggested that Europe could potentially give the region’s emergency backstop fund a significant cash boost. Risk taking also found a little support on the view that the central banks in the US, UK and eurozone may deploy more monetary easing at next week’s meetings, following uncomfortable data from around the globe.

Sterling

The pound plunged across the board and its medium-term outlook looks to be at serious risk after the British economy shrank in the second quarter by three times more than what most investors had foreseen. The extremely worrying statistics also brought the economy’s annual rate of growth in Q2 down and sterling is now likely to face another barrage of speculative attacks before next week’s uncertain Bank of England meeting, in which interest rates may well be slashed.

US dollar

Comments from a member of the European Central Bank put a little hope back in markets that the eurozone still has some crisis-fighting options in its locker, dampening demand for the safe haven US dollar. The greenback also slipped following data on US new home sales in June, which fell by the most in over a year.

Euro

The euro rallied by as much as one per cent against the US dollar after ECB member Ewald Nowotny implied that Europe could potentially deploy a major fire-fighting strategy that could help end the contagion that is threatening the eurozone’s core economies. Mr Nowotny suggested that Europe’s permanent rescue fund could be granted a banking licence. That would give the fund the ability to borrow unlimited amounts of cash from the European Central Bank in order to provide a significantly bigger safety net for Europe’s indebted countries, including Spain.

Japanese yen

The yen is starting to look a little shaky in front of Japanese inflation data that is expected to keep alive the threat of deflation. The Bank of Japan has previously warned that it will pursue aggressive monetary easing if declining price levels persist.