Sterling came under pressure on Friday, after data showed a deeper economic contraction in the UK than earlier thought, dampening expectations of an early interest rate hike and keeping alive the risk of a downturn. Revised official data showed the UK economy shrank 0.6 percent in the last three months of 2010, more than the preliminary reading of a 0.5 percent contraction.
Sterling slumped to a three-week low against the euro after the data, extending its losses versus the single currency this week. It shed 0.6 percent against the US dollar to $1.6040, its weakest in more than a week, while the euro was up 0.2 percent at 85.63 pence. "The main driver for sterling was the GDP numbers which has poured some cold water on expectations of an early rate hike," said Richard Wiltshire, chief fx trader at ETX Capital.
Increasing rate rise speculation has prompted a pile-up in long sterling positions, or bets that the currency will rise, and analysts said the weak data prompted some to unwind those positions. Implied rates, based on indexed swaps and interest rate futures, suggest the BoE will raise rates by 25 basis points in June and once more by the end of the year. Some are still pricing in a 26 percent chance of a hike in April, lower than around 30 percent that was being factored in on Thursday.