LONDON: Sterling dropped against the dollar and the euro on Tuesday after weak consumer spending data added to concerns about weak UK economic growth.
Data from the British Retail Consortium showed retailers suffered from lacklustre Christmas sales, fuelling worries the economy may have contracted in the fourth quarter of last year.
A separate survey showing a broad improvement in business morale in the last quarter failed to lift the pound.
"The specific focus for sterling is how early indications for Q4 (2012) and Q1 (2013) GDP look," said Adam Cole, global head of FX strategy at RBC Capital Markets, who expected the pound to trade in a $1.60-1.63 range in the near-term.
Sterling fell 0.2 percent to $1.6089, retreating from a 16-month high of $1.6380 hit last week after US Federal Reserve minutes signalled a potentially more hawkish stance, helping the dollar make broad gains.
The euro gained 0.2 percent to 81.54 pence, edging off a three-week low of 80.86 pence hit last week.
With no other major UK data releases on Tuesday investors will look to trade balance data on Wednesday to help gauge the UK's economic position. Forecasts are for the trade deficit to narrow slightly.
The focus for market players is Thursday's Bank of England meeting, at which policymakers are expected to hold interest rates and keep unchanged the sum of assets purchased to stimulate the economy.
The European Central Bank also meets on Thursday. It will make a decision on rates and hold a news conference, which investors will be watching closely for hints of a future cut.
Given marginal market speculation of ECB easing, RBC's Cole said if the central bank keeps policy on hold the euro could benefit against the pound.
Citi FX strategists told clients in a morning note the BoE rate decision was likely to be a "non-event" for sterling, but there would be much more focus on the February meeting.
"Weaker than expected economic recovery and still subdued inflation pressures could mean that the MPC (Monetary Policy Committee) could decide to add to its assets purchases before long and thus add to the cyclical headwinds for sterling," the note said.
Underlying weakness in the UK economy is causing some concern Britain may lose its prized triple-A credit status in coming months. Such a move could knock sterling further although some analysts said losses would be limited as a rating cut is already priced in.
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