Sterling hit a six-year low against the dollar and a record trough against the euro after the Bank of England's quarterly Inflation Report predicted the UK economy will shrink sharply next year and inflation may fall to just below 1 per cent.
The euro pared gains against the dollar this afternoon after data underlined economic weakness, while sterling tumbled after a grim Bank of England forecast fuelled expectations for more UK interest rate cuts.
A tentative improvement in European share prices offered some support to the euro, but the currency stayed on the back foot after data showed euro zone industrial production fell more than expected by 1.6 per cent on month in September.
This bolstered the view that a further fall in European Central Bank rates, now at 3.25 per cent, was inevitable to counter the effects of a worldwide downturn.
"The production data confirms that the euro zone is in a technical recession. It confirms that more rate cuts are coming from the ECB," said Lena Komileva, G7 market economist at Tullet Prebon in London.
Eonia interest rate futures indicate that markets are pricing in another big rate cut, with ECB rates seen around 2.5 per cent by next month.
By 12.04pm, the euro rose 0.4 per cent to $1.2570, but hovered well below a session high of $1.2632. It hit a two-week low of $1.2481 earlier in the day, according to Reuters data.
European stocks traded 0.6 per cent higher, paring gains made earlier in the day.
The euro rose 0.3 per cent to 122.66 yen but stayed in range after hitting 121.23 yen, its weakest level since late October, on electronic trading platform EBS earlier in the day. The dollar fell slightly to 97.60 yen.
Reuters