Last week the Pound declined against most major currencies, including the Euro and US Dollar, with the UK economy producing its weakest growth performance since 1992.
This fuelled expectations of an interest rate cut by the year-end. UK growth in the second-quarter was revised downwards from an earlier estimate of 0.2% to 0%, ending a run of 63 consecutive quarters of economic growth.
Despite the deterioration in the growth outlook, the minutes of the latest Bank of England interest rate policy meeting suggested that for the time being inflation remains a threat. The voting pattern showed a second consecutive three-way split; seven opting for no change, one member voting for a cut and one for an increase.
The Confederation of British Industry's distributive trades survey on Thursday will be scrutinised for clues over the strength of retail spending, with consumer confidence data to follow on Friday. Sterling could come under further selling pressure if these reports undermine the outlook for the UK economy in the second half of the year.
Euro (EUR)
The Euro strengthened against Sterling, finding some support on better than expected economic data. The German ZEW economic business expectations survey showed some improvement in confidence towards the Euro zone economy. Euro zone manufacturing activity also increased slightly in August, although the service sector weakened further. The Euro found support on concerns over the inflation outlook, as annual producer price inflation in Germany reached a 27-year high of 8.9% in July.
The GBP/EUR rate closed down 1.35% at 1.2522, from 1.2693 a week earlier, benefiting those selling Euros to buy Pounds.
An estimate of Euro zone inflation in August on Friday will be the key data release this week, with the Euro likely to come under some selling pressure if confidence grows that inflation is nearing a peak.
Read the this week's full currency report containing updates on the US Dollar, Canadian Dollar, Australian Dollar, New Zealand Dollar and South African Rand.
