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Daily currency report

Overview

The British pound fell apart, hitting December 2011 lows against the euro and is waking up to more negative trading bets as investors react to dismal UK economic growth figures. Official first estimates showed the British economy suffered a bigger-than-forecasted contraction in the final three months of 2012, strengthening fears of a potential triple-dip recession. Sterling’s woes against the euro were further compounded by data from the European Central Bank, which suggested Europe’s banking sector was in better shape than expected. The US dollar may also stage a recovery from 11-month lows against the euro with focus now very likely to shift back towards the US economy, while GDP data from Spain mid-week may encourage analysts to refresh their position on Europe’s peripheral economies and a possible bailout for Madrid.

Sterling

Sterling collapsed accordingly, hitting 13-month lows against the euro and five-month troughs against the US dollar. The pound is attracting a fresh wave of selling pressure and fallout from last week’s growth figures and assessment as to how British policymakers will now respond is likely to continue for a few days yet. Sterling could be left with very few backers if evaluations point towards a ratings downgrade and new Bank of England monetary action.

US dollar

With the Federal Reserve open-ended asset buying plan firmly strapped around US labour market data, non-farm payrolls and unemployment figures will be watched very closely. The Federal Reserve has promised to pump almost $100 billion into the US economy on a monthly basis as long as inflation remains low, and until unemployment returns to 6.5 per cent from 7.8 per cent where it sits currently. Weak payrolls data may weigh on the US dollar.

Euro

Signals for traders to restock their euro accounts are growing ever wider, helping the single currency to new December 2011 highs against the struggling British pound. Measures of German business and investor sentiment increased sharply, adding to optimism that Europe’s main economy will recover quickly from its recent slump. Furthermore, loan data from the European Central Bank strengthened its claims that Europe is now seeing ‘positive contagion’ spread through the area. According to ECB figures, euro area banks will pay back a larger-than-expected amount of loans that were taken out under the central bank’s long-term emergency loans facility, known as the LTRO, in another sign that banks are now in better health than before.

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