Sterling fell against the dollar on Wednesday, weighed down by data showing Britain's economy contracted in the fourth quarter and by concerns the Bank of England will ease monetary policy even further. Britain's economy shrank by 0.2 percent in the last quarter of 2011, below the consensus forecast for a 0.1 percent contraction. Growth for the whole year was just 0.9 percent, less than half the expansion recorded in 2010.
The data underpinned expectations that the Bank of England will carry out more quantitative easing after minutes from the Bank's latest meeting said further asset purchases were "likely".
"If they (BoE policymakers) are saying "likely" in the minutes that pretty much means definitely. That's a pretty strong word from the MPC who would normally sit on the fence," said Lee McDarby, head of corporate dealing at Investec Bank PLC. Sterling was last down 0.3 percent against the dollar at $1.5573, fading from a three-week high of $1.5629 hit overnight.
Analysts said the pound may be vulnerable to more falls in anticipation of more QE in February, which could take it towards the 21-day moving average currently around $1.5474, potentially even testing the 2012 low of $1.5234. "Sterling/dollar has been weak in the last month, primarily because of the weakness of the euro but also because of evidence of renewed UK economic weakness," analysts at Lloyds said.
The pound rose against a broadly weaker euro on concerns that the European Central Bank may have to write down its Greek bond holdings as part of a deal to avoid a disorderly default. Concerns about Greece caused the euro to reverse earlier gains against the pound to trade down 0.15 percent at 83.30 pence. It fell from a session high of 83.85 pence, just below Tuesday's near four-week peak of 83.91 pence.