LONDON: Sterling weakened against the dollar and the euro on Tuesday after weak consumer spending data added to concerns about faltering UK economic growth.
Data from the British Retail Consortium showed retailers' Christmas sales barely rose, fuelling worries the economy may have contracted in the fourth quarter of 2012.
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 0.1 percent to $1.6094, 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 to broad gains.
The euro gained 0.2 percent to 81.50 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.
Another focus 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.
Citi FX strategists said the BoE rate decision was likely to be a "non-event" for sterling, but there would be much more focus on the February meeting.
In a note to clients, Citi said weaker-than-expected economic recovery and subdued inflation pressure could prompt the BoE to restart its asset purchase programme after the release of its quarterly Inflation Report next month, which would add to headwinds for sterling.
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 that if the central bank keeps policy on hold the euro could benefit against the pound.
STERLING VULNERABLE
Underlying weakness in the UK economy also fuelled concerns Britain might lose its triple-A credit status in coming months. Such a move could be a further knock to sterling, although some analysts said losses would be limited as a rating cut is already priced in.
Market players also warned the pound could do badly relative to the dollar and the euro -- both of which could also struggle this year -- as worries about weak UK growth undermine its appeal as a safe haven from the euro zone debt crisis.
"People have ended up buying sterling thinking it is a safe haven currency but I think people haven't looked enough at the fundamentals," said David Bloom, global head of FX strategy at HSBC, adding that the perception of the UK as a safe haven should reverse.
"I think the UK will lose the battle of the uglies this year...we don't think the fiscal situation looks good."
HSBC's Bloom said sterling/dollar would fall to $1.52 by year-end, while euro/sterling should rise to 88 pence.
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