The British pound collapsed dramatically, hitting two-week lows versus the euro following revised data showing the UK economy shrank by more than expected in the fourth quarter. The news will keep alive the possibility of additional monetary easing by the Bank of England to avoid a more meaningful economic slump. The US dollar quickly recovered earlier lost ground but also added to its gains after more disappointing US data bolstered global growth worries. Currencies linked to growth subsequently remained under pressure with the Australian dollar dropping to January lows. Demand for risky assets was very much limited; however, the euro was little-moved, perhaps reflecting cautious optimism eurozone leaders could announce an improved bailout fund. The yen extended its recent improvement after Japanese retail sales grew by more than forecast, damping concerns of more Bank of Japan stimulus.

Sterling

Sterling fell sharply against the US dollar and sank to a two-week low versus the euro following data showing the UK economy contracted by a bigger-than-expected margin in the fourth quarter. Traders may continue to limit their exposure to the pound if economic data strengthens the case for the Bank of England to restart its money-printing press.

US dollar

The safe haven US dollar strengthened again after another below-forecast economic report added to worries about the health of the global economy that is already at risk from a Chinese slowdown.

Euro

Despite the euro’s move higher against the pound, the shared currency traded pretty much in a familiar price range against other major currencies suggesting that investors remain guarded ahead of upcoming events in the eurozone. Market confidence that leaders will reinforce the region’s bailout fund in the Copenhagen meeting this week will be tested as Italy is scheduled to auction fresh debt. Bond yields may spike if the budget announcement in Spain, that should highlight Madrid’s dismal fiscal outlook, tempers demand for eurozone government debt.

Japanese yen

The yen extended this week’s improvement against the British pound following better-than-expected local consumer spending data and a continuation of support from year-end repatriation flows.

Travelex Global Business Payments Malta, freephone: 800 733 22, www.travelex.com/mt/

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