The UK economy unexpectedly contracted by 0.4% between July and September, according to official figures released this morning. It is the first time that UK GDP has contracted for six consecutive months since figures were first recorded. This goes against the forecast of 0.2% growth, which was widely expected. There is now every indication that the British economy is in for a long, hard slog as it tries to turn itself around.

Pound Sterling - UK markets

Sterling enjoyed a positive day on Wednesday as it reacted to the minutes from the last MPC meeting. The committee voted 9-0 for no policy change and a hold on further quantitive easing measures. Governor King had indicated that the UK economy had probably returned to modest growth in the second half of this year and the pound rallied to a high of 1.11 versus the euro and 1.66 against the US dollar.

This morning's events, however, have dashed that optimism. Sterling is very bearish and struggling to sustain market levels of GBP/EUR 1.09 and GBP/USD 1.64. Across the board, the pound has lost around 2% value so far.

US Dollar - US Markets

The dollar remains vulnerable. According to Nomura Research Institute Ltd , more government spending is still needed. The US's likely return to growth in the second half of this year doesn't mean recovery is assured. The Obama administration still needs to rein in a record $1.4 trillion budget deficit, but will still look to pump more capital into the banking system. According to Nomura, lowering the benchmark rate to near zero and already pumping more than $1 trillion into the economy isn't sufficient.

Current trading levels are bullish against the pound at 1.6418 and struggling against a rampant euro at 1.5042 - a new low for the year.

Euro - European Markets

The euro is enjoying a rally today through a string of upbeat reports. Eurostoxx 50 Index rose 1.05%, German DAX Index added another 1.05% and the French CAC Index advanced 1.1%. The currency has gained over 2 cents against a struggling pound to a current position of 0.9153 and is pushing the dollar hard at 1.5042. The 1.50 barrier has been well and truly broken this week and there is still upside potential for further gains.

Other Currencies - Highlights

The Japanese yen is headed for a weekly decline versus 13 of its 16 most traded counterparts as the MSCI World Index snapped three days of declines, rising 0.4%.

 The Swiss franc is likely to strengthen to 1.50 per euro by year-end as a recovering economy and accelerating inflation prompt the central bank to stop selling the currency, according to Morgan Stanley.