The Pound slumped to the lowest level in three weeks against the Euro, while the UK currency also traded lower versus the basket of currencies, amid concern that rising oil prices may curtail the pace of the economic recovery. Brent crude oil prices have rocketed to a thirty-month high of more than $119 a barrel in the past week, while the Pound is also vulnerable to speculation over when the Bank of England will begin raising interest rates. A report from the Office of National Statistics on Friday showed that the UK economy contracted by more than initial estimates in the fourth quarter. UK gross domestic product fell -0.6% in the three months to December, which means that the economy has further to recover in the first quarter. The Pound was blocked just above 1.6150 against the Dollar before the data and there was also weak readings for business investment and service sector activty, which reinforced unease over the sustainability of the recovery. There should be a collective bounce in the first quarter of 2011, after the economy was impacted by the worst weather for December in a century. The focus this week will fall squarely on the latest manufacturing and services PMIs, especially as the Bank the England will be watching the survey evidence very closely when it takes its interest rate decision next week. The Pound retreated to low near 1.6040 against the Dollar, before recovering through the Asian session overnight, gaining some support on the stabilisation of risk appetite.
The Euro encountered strong resistance around 1.3820 against the U.S Dollar and drifted weaker through the course of the day with lows near 1.3720. The slight moderation in oil prices curbed U.S selling pressure and the Euro was vulverable to a technical correction after failing to break key levels. U.S gross domestic product in the fourth quarter was unexpectedly revised lower to 2.8%, from 3.3% in preliminary forecasts. In contrast, the University of Michigan consumer confidence index was revised higher for February to the strongest reading since January 2008. The fact that confidence seems to be improving despite rising energy costs could be an important economic signal, although there may be a delay before any negative impact is registered. The Irish election results were in line with opinion poll readings and the new government may take a more aggressive line on Irish debt obligations, weighing the Euro as underlying stresses within the Euro-zone persist. The focus this week will be on the ECB interest rate announcement and accompanying press conference. Markets will be anticipating a tough stance on inflation and there will be some speculation that the bank will effectively signal a near-term increase.