The Pound came under pressure during mid-week, trading at lows of €1.1724 and US$1.5145, as attentions remained fixed on Friday's European banking sector stress results.
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Wednesday's Bank of England minutes recorded a repeat vote of 7-1 against a rise in interest rates. Comments from the Bank failed to provide buying support to Sterling, reiterating its previous unease over high UK inflation and weaker economic growth outlook. However, Friday's UK Gross Domestic Product (GDP) data estimated the UK's economy grew at its fastest pace in four years, 1.1% in the second quarter of 2010, helping the Pound back above €1.20. UK retail sales also gained, but June's mortgage approvals fell and UK public sector net borrowing dropped less than expected.
As the markets take stock of last Friday's 'stress test' results, the UK has a relatively light economic calendar and is likely to rely on news abroad.
Euro (EUR)
Starting the week on the front foot, the Euro initially extended gains against Sterling and the US Dollar. Sentiment towards the Euro improved as a string of encouraging economic results were announced; the German producer price index, Euro zone purchasing manager's index and Euro zone industrial new orders, all showed gains in their latest releases.
Although the Euro fell slightly ahead of the stress tests, concerns were eased after the results confirmed only seven of the ninety one banks failed the tests (five of them being smaller Spanish banks). Subsequently, these banks will have to increase their capital balances by a smaller than expected €3.5 billion. However, doubts remain as to whether the assumptions used in the tests were sufficiently rigorous to restore the longer-term confidence.
The GBP/EUR rate closed the week up 1.05% at 1.1956, from 1.1830 a week earlier, benefiting those converting Sterling into Euros.
Germany will have its part to play in the Euro's performance this week. Economic announcements include German retail sales data on Tuesday, German consumer inflation data on Wednesday and German unemployment data as well as European economic confidence data on Thursday.
US Dollar (USD)
A lack of confidence in US economic growth prospects continues to weigh on the US Dollar. US Federal Reserve Chairman Bernanke retained a cautious stance on the US economic outlook in his statement on Wednesday. News on Friday that seven more US banks are due to fold helped the Pound back through US$1.54. Although US housing and US consumer confidence data posted positive gains, this did little to provide the US Dollar with any foothold to launch a recovery.
The GBP/USD rate closed the week up 0.91% at 1.5421, from 1.5280 a week earlier, benefiting those converting Sterling into US Dollars.
This coming week sees US consumer confidence and manufacturing index data on Tuesday. US durable goods orders data is due on Wednesday, whilst key US GDP data will be released on Friday.
Canadian Dollar (CAD)
After sustaining heavy losses versus Sterling during the previous week, the Canadian Dollar's relative performance improved last week. With the Canadian Dollar helped by buoyant oil prices and generally upbeat economic data, the GBP/CAD rate dropped to intra-week lows of 1.5808.
Positive sentiment towards the Canadian Dollar was encouraged on Tuesday as the Bank of Canada raised interest rates by 0.25% to 0.75%. The Bank retained its general stance over future policy, stating that further rate rises will be dependent on both domestic and international developments. Canadian wholesale sales, retail sales and consumer inflation data all dipped slightly in their latest releases, undermining some support for the Canadian Dollar later in the week.
The GBP/CAD rate closed the week down 0.75% at 1.5981, from 1.6102 a week earlier, benefiting those converting Canadian Dollars into Sterling.
With a light domestic economic calendar this week, the Canadian Dollar is likely to be influenced by the prices of natural resources such as oil. Canadian industrial product price data is due for release on Thursday, with Canadian GDP figures for May announced on Friday.
Australian Dollar (AUD)
Initial hopes that the Euro zone debt crisis could be receding, along with strong corporate earnings results, boosted support for higher interest rate currencies such as the Australian Dollar; with investors seeking higher interest rate returns as optimism levels improved. The minutes of the Reserve Bank of Australia's policy meeting offered some encouragement, noting signs of the private sector taking over from the public sector as the driver of growth. However, business confidence slipped in the second quarter of 2010 and the annualised growth rate of the Leading Index (of economic growth) fell for a second month in a row.
The GBP/AUD rate closed at 1.7220, down 1.84% from 1.7542 a week earlier, benefiting those converting Australian Dollars into Sterling.
Wednesday's consumer price inflation data for the second quarter 2010 will be the key release this week on Wednesday. The Australian Dollar could benefit if this data is stronger than expected, raising the likelihood of an interest rate rise in the August policy meeting.
New Zealand Dollar (NZD)
The New Zealand Dollar climbed against Sterling last week, with the GBP/NZD rate falling from Monday's highs above 2.17 to lows under 2.10 on Friday. In a quiet week for domestic data, a fall in New Zealand consumer confidence to an 11-month low in July had little impact on the currency. The New Zealand Dollar took its direction from offshore developments, gaining momentum as commodity prices and global stockmarkets lifted.
The GBP/NZD rate closed at 2.1180, down 1.42% from 2.1485 a week earlier, benefiting those converting New Zealand Dollars into Sterling.
The Reserve Bank of New Zealand will announce its latest interest rate decision on Wednesday this week, with a 0.25% rise to 3% widely expected. An interest rate rise would be likely to benefit the New Zealand Dollar, particularly if the accompanying statement lifts future interest rate expectations and investors' optimism levels remain buoyant.
South African Rand (ZAR)
The South African Reserve Bank left interest rates on hold at 6.5%, despite Governor Gill Marcus asserting that the economy's fragile recovery was likely to have slowed during the second quarter. The decision boosted the Rand, given some prior speculation of a rate cut. Separately, Finance Minister Pravin Gordhan cited the football World Cup as adding 1% to South Africa's economic growth this year. Improving global stockmarkets and investor optimism also favoured the Rand, with buying support for the currency lifting as investors sought the riskier currencies with higher interest rate returns.
The GBP/ZAR rate closed at 11.4647, down 1.16% from 11.5994 a week earlier, benefiting those converting South African Rand into Sterling.
The health of the domestic economy will be in focus on Tuesday with the Quarterly Labour Force Survey (second quarter 2010). The Rand might gain further support on Wednesday if the latest consumer price inflation data is higher than anticipated.
