Sterling tumbled to a two-and-a-half month low against the euro on Tuesday as a shock contraction in the UK economy caused investors to scale back expectations for interest rates rises in coming months. Britain's economy shrank 0.5 percent in the last three months of 2010, confounding forecasts for a 0.5 percent expansion and prompting warnings of a grim 2011.
The pound was punished, dropping at least one percent against all major currencies as investors reassessed the view that high inflation would force an early Bank of England rate hike. UK interest rate futures jumped, with the June short sterling contract on track for its biggest one-day gain since last June's Budget as investors took bets on a May rate hike off the table. The euro jumped 1.3 percent to a high of 86.49 pence, its strongest since November 8. A UK clearer had been reported as the main euro buyer in early trade. At 1649 GMT it was at 86.21 pence.
Michael Hewson, analyst at CMC Markets, said the euro could target 87.00 pence, the 61.8 percent retracement of the down move from the October highs at 89.40 to the lows this month at 82.85. Beyond there, its 100-week moving average stands at 87.18 pence.
Sterling was down close to 2 cents against the dollar at $1.5802, having hit a low of $1.5750 to mark a fall of 1.5 percent on the day, though technical analysts said there was support from its 100-day moving average at $1.5761.