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Sterling falls due to contracted UK economy

Published:  28 February, 2011

Sterling fell on Friday as data showed that the UK economy contracted by more than had initially been anticipated for the fourth quarter of 2010.

Sterling fell on Friday as data showed that the UK economy contracted by more than had initially been anticipated for the fourth quarter of 2010.

Currency rates

EURO/GBP - 1.1707

US$/GBP - 1.6200
CHF/GBP - 1.5001
CAN$/GBP - 1.5810
AUS$/GBP - 1.5934
ZAR/GBP - 11.296
JPY/GBP - 132.34
HKD/GBP - 12.612
NZD/GBP - 2.1523

SEK/GBP - 10.2921
US$/EURO - 1.3826

The second estimate showed a contraction of 0.6% against the previous estimate of 0.5%. As a result, sterling slumped to a three week low against the euro and dropped against the US dollar. The correction left many analysts questioning whether interest rates would now be increased, but there is still an expectation that rates will be hiked by 0.25% before June. This should see sterling remain above or around $1.60 against the US dollar, but further negative data will have an impact and knock sterling. It is a quiet day for data today, but later in the week we have house price data and a wide array of PMI purchasing manager data which will give an idea of activity in the services, manufacturing and construction sectors.

In the euro zone, it seems that with all the focus the Middle East and North Africa, many have forgotten about the euro zone debt crisis. European leaders have been unable to find a solution still but talk of inflation and interest rates has kept the frenzied bond selling at bay for a few months. It is a big week in the region though, with the European Central Bank rate decision on Thursday and a number of bond auctions throughout the week which could cause the markets to remember all their concerns over peripheral European debt.

In the USA, tensions caused by uprisings and protests in the Middle East and North Africa have had a large effect on the price of oil and the US dollar did not follow 'normal' risk averse buying patterns. With concerns over the impact on US foreign policy of widespread upheaval in the Middle East, the Swiss franc was the major benefactor of last week's tensions. In the USA, the big event of the week is Friday's non-farm payroll figures.

Elsewhere, the Canadian dollar hit its strongest level against the US dollar in nearly 3 years as the country's largest export - crude oil - posted the largest weekly price gain since 2009.

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