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Daily currency report

Overview

Sterling endured further selling pressure following poor UK retail sales figures as markets gear up for crucial economic growth data that will very likely shape the pound’s outlook in currency markets over the coming months. Cable is now hovering just above November 2012 lows while sterling has also breached 10-month lows against the euro. Investors fear that a negative GDP reading could open the British currency up to heavier speculation concerning a potential triple-dip economic recession and a ratings downgrade. Analysts will also study the latest Bank of England minutes and UK public borrowing figures. The euro remains in a much stronger position against its main rivals, including the Swiss franc but will be tested by this year’s first euro area ministers meeting.

Sterling

Cable crashed to two-month lows and is now trading within touching distance of September 2012 troughs after data showing an unexpected drop in British retail sales last month cemented fears about the weak state of the economy. The latest data on Britain’s services sector and consumer spending, two key sources of economic growth, have completely missed forecasts. Sterling bears are now growing in numbers as speculation continues to mount that GDP data will confirm the British economy shrank in the final three months of 2012. Weak public finances highlighting a precarious austerity programme and negative economic growth could leave sterling fighting assumptions that Britain is well on the road to a ratings downgrade.

US dollar

A key source of US dollar strength in recent months has come from investors fleeing the yen amid deep concerns the Japanese Government will force the Bank of Japan onto a path of aggressive monetary easing. Japanese officials suggested losses beyond the current two-and-a-half-year lows for the yen against the US dollar would be welcomed from a Japanese economic perspective. An announcement may correspond with that assessment, adding to the US dollar’s value. However, big expectations are not always met, leaving the greenback wide open to the risk of profit-taking.

Euro

The euro climbed to a 10-month high against an under-fire British pound and may hold those levels despite a disappointing defeat for German Chancellor Angela Merkel in local elections. The defeat could make Germany’s general elections later this year more uncertain for global investors, and perhaps cloud or even inverse Berlin’s recent determination to put an end to the debt crisis.

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