Shock contraction figures sent sterling tumbling to a two-and-a-half month low against the euro on Tuesday, causing investors to scale back expectations of an interest rate rise in the 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 tough 2011.
The pound ended up 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
On Tuesday evening sterling was also weighed down by comments from the Bank of England Governor Mervyn King. King stated inflation is likely to rise towards the 4-5% level while any interest rate hike will be based upon longer term goals.
The dollar remained at near a 10-week low against a basket of currencies on Wednesday as the market continues to look for confirmation from the Federal Reserve that its focus remains on supporting growth.
The perception that the Fed will keep a much easier policy than the European Central Bank, which is growing worried about inflation, has helped the euro to extend its recovery after a two-month drubbing from worries over Eurozone debt.
The dollar weakened broadly, largely due to falling bond yields making dollar denominated assets less attractive.
The euro climbed to a 2 high month against the US dollar and a 10 week high versus the pound during Tuesday trading.
The weak UK GDP figures boosted the euro, which also benefited from the European Financial Stability Facility’s inaugural debt issue. After the order book closed with bids valued at 43 billion euros for the 5 billion euros of paper on offer, speculation that the new issue will be massively oversubscribed is rife.