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Posted January 26th, 2011 by Charles Purdy

EUR/GBP Rate & Comments for 26th January 2011

EURO/GBP - 1.1540

Sterling plummeted yesterday – dropping by 1.3% against the US dollar and 1.1% against the euro – as 4th Quarter GDP showed that the UK economy contracted by 0.5% in the last 3 months of 2010. Markets were expecting December’s poor weather to have an impact with analysts expecting a 0.5% gain, but the figure came as a great shock as there no longer seems to be any justification for last week’s talk of higher interest rates before the summer. Sterling is likely to maintain subdued now for the coming months until the fundamental data catches up with inflation – especially after Mervyn King essentially ruled out any interest hikes for some time after insisting that inflation would retreat after peaking at 5% later this year. On the plus side, we have seen a lot of clients moving sums back into sterling taking advantage of sterling’s demise.
In the euro zone, the euro rapidly jumped to a 2 ½ month high against sterling as the shock UK GDP contraction came through. The euro hit €1.1562/£1 – the highest level since November the 8th – as markets scaled back their expectations of an interest rate rise in the UK that had buoyed the pound last week. Aside from the euro’s movement against sterling, French consumer spending beat expectations, and the currency hardly moved against the US dollar all day as the majority of traders focused on sterling. Out today, we minimal data and Europe is likely to be overshadowed by UK and US interest rate minutes and policy announcements. Call in now for a live exchange rate.

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