LONDON: Sterling dipped from a three-week high versus the dollar on Wednesday, and looked likely to stay under pressure ahead of the release of UK growth figures later in the session that are expected to show the economy has contracted.
Economists are forecasting UK gross domestic product to have declined by 0.1 percent in the final quarter of 2011, a reading that would increase speculation the Bank of England is preparing to pump more money into the economy to boost growth.
Minutes from the BoE's latest policy meeting, also due at 0930 GMT, are expected to confirm a strongly dovish tone from the central bank.
Analysts said sterling was vulnerable to selling if GDP figures and BoE minutes paint a bleak economic picture, but with much of the bad news already priced in the extent of any fall would be limited.
"The market is braced for a negative number and at the same time braced for a signal that quantitative easing will get extended at the next meeting next month," said Gavin Friend, currency analyst at National Australia Bank.
"That's partially in the price, although these things can always surprise. If we were to get anything worse than minus 0.1 this would be even more negative for the currency."
Sterling was down 0.2 percent against the dollar at $1.5592, down from a three-week high of $1.5629 hit overnight. CitiFX Wire said in a note that traders thought sterling should be a sell on any near-term rallies, and would look to enter shorts above $1.5650 targeting a retracement to $1.5530/50.
The euro rose 0.2 percent to 83.61 pence, holding well above a 16-month low of 82.22 pence hit on Jan. 9. The single currency was supported by better-than-expected euro zone services and manufacturing data, although market players were wary of pushing it much higher in the absence of a Greek debt swap deal.
National Australia Bank's Friend said he expected sterling to perform worse against the euro than the dollar if GDP numbers surprised to the downside, with 84.00/25 pence seen as a reasonable target.
KING SPEECH
In a speech on Tuesday BoE Governor Mervyn King said the central bank had scope to give the economy another cash boost if needed as inflation is falling and Britain faces an "arduous, long and uneven" economic recovery.
His comments added to expectations in the market that policymakers would announce a further 50 billion pounds of quantitative easing next month in a bid to boost the economy.
The last round of QE in October did not weigh significantly on sterling but analysts said the need for further economic stimulus added to a shaky outlook for the pound.
"The outlook for the UK is far from positive, as highlighted by BoE King's speech. So far, the latest round of QE has not impacted GBP in the same way as the initial round, but we continue to believe that GBP, with the exception of EUR, will underperform the other G10 currencies," Morgan Stanley analysts said in a note.
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