Euro weakens on rate cut evidence

Many analysts have predicted that the euro will reach parity with the pound

The euro has slipped against the pound and the dollar as expectations rise that the European Central Bank will cut interest rates again on 15 January.

Eurozone inflation figures showed a bigger-than-expected drop while the purchasing managers' index showed a contraction in the service sector.

The pound is trading at 1.09530 euros while the dollar is at 0.74765 euros.

The ECB has cut rates from 4.25% to 2.5% since October, as inflation has dropped from its July peak of 4%.

Cutting interest rates can hurt a currency because investors buy other currencies to seek better returns.

The situation with the euro is less clear, however, because UK interest rates are also expected to be cut next week and US rates are effectively zero.

Instead, currency strength is reflecting the perceived relative strength of economies and in recent months the eurozone economy has been seen as less vulnerable to the downturn than those of the UK or US.