The British pound tumbled to fresh six-month lows against the US dollar and will be at risk of further losses after the Bank of England gave investors another dovish stamp on monetary policy in its quarterly inflation report. Expectations of more monetary stimulus from the Bank of Japan also grew after the Japanese economy unexpectedly shrank again over the fourth quarter. However, the yen is likely to escape further selling pressure for now with investors cautious ahead of this week’s G20 meeting where leaders are expected to address the Japanese currency’s rapid decline. The yen was also helped after the Bank of Japan announced no changes to its current stimulus plans following the central banks’ latest two-day monetary policy meeting. The US dollar has jumped against the euro after Germany registered its biggest quarterly contraction since 2009 and data on US retail sales met forecasts from most analysts.

Sterling

The Bank of England’s latest quarterly inflation report proved damaging for the sterling, which dropped sharply to fresh six-month lows against the US dollar after Governor Mervyn King set out a very dovish outlook for UK monetary policy. Speaking after the latest growth and inflation predictions, King said that policy remains “exceptionally supportive”, and that the central bank will offer more monetary support if required, even if inflation continues to overshoot its two per cent target. The prospect of further quantitative easing saw the pound fall by over one per cent against the euro before recovering slightly.

US dollar

Caution ahead of this week’s G20 summit and data on US retail sales supported the US dollar. The US currency has also made a strong start following weaker-than-expected fourth quarter GDP figures from Germany and France. The US dollar is also moving quickly towards June 2012 highs against the British pound after the Bank of England in its quarterly inflation report left the door open to looser monetary policy.

Euro

The euro is under heavy pressure against the US dollar after the German economy reportedly suffered its biggest contraction in the fourth quarter since 2009, while France’s economy also posted weak numbers. A deeper-than-expected economic recession in Europe should continue to keep the euro on the back foot if investors worry the European Central Bank will soon take action to safeguard the region’s economic recovery.

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