Sterling hit a one-week low against the dollar and the euro on Monday after a surprise contraction in UK economic growth dashed recent optimism the country is recovering. Last Friday's data prompted investors to acknowledge it is too early for the Bank of England to remove its stimulus for the economy, and that quantitative easing may be extended as soon as next month.
Sterling recouped some losses on Monday as traders adjusted short positions in the currency, but many in the market said the ongoing weakness in the UK economy would keep the pound under downward pressure. "Sterling's rally had been driven by short covering, and the GDP figures really stamped that out," said Lauren Rosborough, senior currency strategist at Westpac in London.
Markets awaited a speech by BoE board member Adam Posen later in the day. Traders will be on the lookout for any clues into whether the BoE may step up quantitative easing at its November meeting, and by how much. The pound fell as low as $1.6251 on Monday, its weakest since October 19. By 1515 GMT, it had recovered to $1.6375, up 0.4 percent on the day against a broadly weak dollar.
Many analysts said sterling's overall weakening trend had resumed after it fell roughly 3 cents against the dollar on Friday after the growth figures and posted its worst daily performance in more than seven months. On Monday, the UK currency managed to tread just above its 100- and 55-day moving averages, but analysts said a daily close below those levels would likely open the door to more losses.
The euro rose as much as 0.3 percent to 92.40 pence, its strongest since October 15, before pulling back to around 91.67 pence. It rallied 1.8 percent on Friday, its best one-day rise in percentage terms since March. Euro/sterling hovered near its 14- and 21-day moving averages on Monday, and some analysts said a push above those levels would signal more upward pressure for the single currency.
Sterling's weakness particularly against the euro pushed the pound's trade-weighted value as low as 78.90, its weakest in more than a week. The latest IMM positioning data shows that on a net basis, contracts to sell sterling shrank to around 43,000 through Tuesday from around 65,000 the week before.