Sterling struggled to make headway against most other major currencies last week, but held its ground against the US Dollar and ended modestly higher against the Canadian Dollar.
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The Pound came under heavy selling pressure on Tuesday after Bank of England policymaker Martin Weale said the UK faces a significant risk of sliding back into recession, and that the Bank's forecasts might be overly optimistic.
However, positive surprises in the latest UK data later helped to limit the Pound's losses, particularly as fears also remained over US and Euro zone economic prospects. The Confederation of British Industry's retail trade survey reported sales picking up pace in August, sustaining momentum after July's football World Cup boost. Friday's estimate of UK Gross Domestic Product growth in the second quarter was raised to 1.2%, from an initial report of 1.1%, largely reflecting a rebound in construction activity.
In a relatively light week for UK economic data, Augusts' manufacturing activity data (Wednesday) and services sector activity data (Friday) will provide the highlights. If stronger than expected, the data could underpin support for the Pound by reinforcing hopes the UK economy might maintain its growth momentum into the third quarter of 2010.
Euro (EUR)
The Euro closed the week slightly higher against Sterling, despite starting last week on the back foot after Monday's purchasing managers' survey data suggested Euro zone factory and services sector activity growth moderated in August.
The domestic data was generally more upbeat for the remainder of the week; the Euro's appeal boosted by a fourth solid increase in Euro zone industrial orders in the past five months, as well as a rise in German business confidence to a 3-year high. However, the Standard & Poor's credit ratings agency lowered its Ireland rating by a further step, owing to increasing costs of support to its financial sector. This served to remind investors of the diverging performances between the weaker and stronger member economies, limiting the Euro's overall gains.
The GBP/EUR rate closed the week down 0.44% at 1.2163, from 1.2217 a week earlier, benefiting those converting Euros into Sterling.
The European Central Bank (ECB) will meet on Thursday this week, with no change in interest rates (presently 1%) widely expected. The focus of attention is likely to centre on the ECB's assessment of the current economic environment, its latest projections, and any comments about possible future policy.
US Dollar (USD)
The pound initially lost ground against the US Dollar last week (to US$1.5369), before paring losses to close the week virtually unchanged (at US$1.5527).
The second estimate of second-quarter US Gross Domestic Product was lowered to 1.6% (annualised), from an earlier estimate of 2.4%, although this drop was slightly less than had been feared. However, US data earlier in the week did little to dispel concerns of a slowing growth outlook; US existing and new home sales both plunged in July, whilst July's new orders for durable goods rose much less than expected. At the US Federal Reserve's annual retreat to Jackson Hole, Chairman Bernanke remarked that policymakers would provide further support to the economy, but stopped short of saying what would be the triggers for action to be taken.
Given the US Federal Reserve's dual mandate to control inflation and maximise employment, one such trigger could be upcoming non-farm payroll data; the latest monthly figures are due on Friday, with the US Dollar liable to lose some support particularly if the change in private sector employment disappoints forecasts. Other notable reports include the minutes of the Federal Reserve's recent policy meeting (Tuesday), manufacturing activity data (Wednesday), and pending home sales data (Thursday).
Canadian Dollar (CAD)
The Canadian Dollar closed the week as the worst performing of the major currencies last week, despite oil prices rising strongly over the second half of the week. The Canadian retail sales report disappointed prior expectations for a 0.4% rise in June, with sales actually lifting just 0.1%. Lacklustre US economic reports, Canada's most important trading partner, also weighed on the Canadian Dollar.
The GBP/CAD rate closed the week at 1.6317, up 0.19% from 1.6286 a week earlier, benefiting those converting Sterling into Canadian Dollars.
Canada's Gross Domestic Product (GDP) for the second quarter has just been reported (31St August); an annualised 2.0% growth in GDP was below market expectations of 2.5%, and much cooler than the 5.8% first quarter growth performance. With no economic data remaining due for the rest of this week, the Canadian Dollar is likely to look to international developments and commodity price trends for direction.
Australian Dollar (AUD)
The Australian Dollar pared mid-week losses against the Pound, with the GBP/AUD rate dropping more than 2.5 cents on Friday alone. An encouraging finish to the week for global stockmarkets provided a late-week boost to higher interest rate currencies, such as the Australian Dollar. The domestic economic data largely took a back seat to international developments, although a 3.54% rise in total construction work during the second quarter (in line with expectations) suggested continuing recovery in the sector.
The GBP/AUD rate closed at 1.7268, down 0.78% from 1.7404 a week earlier, benefiting those converting Australian Dollars into Sterling.
This week's key release on the domestic economic calendar will be Wednesday's Gross Domestic Product report for the second quarter, whilst Thursday's international trade data for July will also attract interest. The Australian Dollar could make further headway if the data reinforce a brightened economic growth outlook.
New Zealand Dollar (NZD)
In a light week for domestic economic data, the New Zealand Dollar's performance was closely tied to changes in investors' optimism levels. The GBP/NZD rate's intra-week high of 2.2206 on Wednesday coincided with sharp losses on global stockmarkets. The Reserve Bank's inflation expectations survey found expectations for consumer price inflation in two years time fell to 2.6%, from 2.8% previously, although the data had only a limited impact on the currency.
The GBP/NZD rate closed at 2.1828, down 0.56% from 2.1950 a week earlier, benefiting those converting New Zealand Dollars into Sterling.
In another light week for domestic economic data, investors' sentiment levels and broader global stockmarket performances are likely to be the major influences for the New Zealand Dollar.
South African Rand (ZAR)
The South African Rand lacked clear direction against Sterling last week, but recovered some ground particularly late on Friday. The Rand had weakened after two key reports showed inflation fell to its lowest level in more than four years and economic growth slowed to an annualised 3.2% pace in the second quarter. The data prompted speculation that the South African Reserve Bank could lower interest rates at its 9th September policy meeting.
The GBP/ZAR rate closed at 11.313, down 0.17% from 11.332 a week earlier, benefiting those converting South African Rand into Sterling.
With little in the way of major domestic data remaining due for the rest of this week, wider trends in global stockmarkets and investors' optimism levels are likely to remain important influences for the Rand's performance.
