Sterling fell to a two-week low against a broadly firmer dollar on Tuesday after credit rating agency Moody's said a recession in eastern Europe would affect western Europe's banking sector. However, with some eurozone economies more exposed than Britain to that region, sterling managed to gain some ground against the single European currency.
Credit rating agency Moody's said the recession in emerging Europe was likely to be more severe than elsewhere and would put financial strength ratings of local banks and their Western parents under pressure. The report undermined stocks, with world share prices falling 1.3 percent. British stocks were down 1.1 percent early in London.
In the currency markets, concern about the global economic outlook pulled investors towards the highly liquid dollar, leaving sterling and the higher-yielding Australian and New Zealand dollars in the shade. "Sterling has been driven by a spike in risk aversion overnight, particularly in relation to Europe and more particularly the European banking sector," said Geraldine Concagh, economist at AIB Group Treasury in Dublin.
By 0829 GMT, the pound had fallen 0.8 percent to $1.4154, having earlier hit $1.4125 - its lowest since February 2. Euro selling prompted by the Moody's report left the single currency down 0.4 percent at 89.08 pence. The pound could face further pressure after the 0930 GMT release of UK inflation data, which is expected to show the headline inflation rate eased further last month due to aggressive discounting by retailers and cuts in value-added tax.
Economists forecast consumer prices fell 1.0 percent on the month in January, slowing the annual growth rate to 2.7 percent compared with 3.1 percent previously. The wider retail price index, which measures the impact of mortgage payments, is seen falling 1.5 percent on the month, pushing the annual rate into negative territory.
"Lower inflation should support consumer real incomes and may be viewed as providing some support for the economy going forward," Calyon strategists said in a note to clients. "The drop in inflation will support the outlook for another and probably last 50 basis point cut at the March monetary policy meeting." Bank of England policymakers have been on an aggressive path of monetary easing, with British borrowing costs now at a record low of 1 percent.