Last week after making steady gains for almost a month against both the US Dollar and the Euro, Sterling starting moving back and rates fell away from some of the best buying levels we have seen all year.
The reason for initial gains were a weakening Euro following news they may also make a foray into Quantitative Easing, much like the US, UK and Japan have already done. This meant investors became wary over value of the Euro, and so started to move funds into other percieved safer currencies - this weakened the Euro and pushed rates above 1.13 briefly however have now dropped away.
The pound fell on Friday after UK Trade and Investment Minister Mervyn Davies said that he was 'not worried' about a further slide in the currency, and added that a weak currency would help the British economy out of the recession. So, this may be good for exporters, however anyone needing to buy foreign currency with Sterling will not be pleased with the statement, as it indicates that further drops in exchange rates may be on the horizon.
The euro was also stung by comments from the ECB President on Friday, which bolstered the view the central bank will launch unconventional monetary policies next month. Speaking in Tokyo, Trichet said that banks would be the focus of such policies, without offering any details on the plan. It probably means that Quatitative Easing will be announced, which will likely weaken the currency as it did the pound. This is the only reason GBPEUR rates have not dropped away more sharply.
"Sterling is being held hostage to euro/dollar moves," said Marc Ostwald, strategist at Monument Securities in London.
UK economy not set to recover for some time
The British economy is not likely to stage any sort of recovery until this time next year, forecasts by two business groups have predicted. The CBI has said that there will be economic growth in spring next year but also added that any recovery would be "slow and fragile". This will do little to help boost Sterling rates any further, and combined with a gloomy budget expected this week, we may see losses for the pound.
UK Budget Statement this week
Chancellor Alistair Darling is expected to announce some £15bn of spending cuts over the next few years when he delivers his Budget statement this week. Shadow chancellor George Osborne has said the Budget which is expected to confirm a 3% drop in GDP this year, will "lay bare" Labour's economic failings.
"It will be a day of reckoning and I think you are going to see the chancellor forecast the longest recession that Britain has had since World War II," he said. Most analysts agree that he will announcea projected drop in annual growth of between 3% and 3.5% - this would mean the UK is in its worst recession since world war 2. However, Mr Darling is expected to say the economy will return to growth next year and gain further strength in 2011.
This however, will do very little in the short term to support the pound. Lots of other economic data is released this week for the pound, including the Bank of England minutes which will give an idea of further monetary policy from the Bank.
We also have lots of inflationary measures - CPI, RPI and retail sales. Below is an outline of some of the more important data releases this week. It's much busier than last week, and I expect the recent gains made by the pound to be wiped out by poor UK economic data.
Remember GBPEUR rates are still close to the best we have seen all year, and GBPUSD rates are only just below the best rates for several months. I beleive we are due for a fall , and therfore if you have an upcoming requirement to transfer funds abroad, please contact us to discuss how we can help.
This weeks data
Monday
Aus - Producer Price Index
US - Leading Indicators (measures future trends of the overall economic activity)
Tuesday
Ger - Producer Price Index
Ger - ZEW Survey
UK - Consumer Price Index
UK - Retail Price Index
Wednesday
Aus - Consumer Price Index
UK - BoE Minutes
UK - Jobless Claims & Unemployment
US - House Prices
Thursday
Jap - BoJ Governor speech
EU - Purchasing Managers Index
EU - Industrial Orders
CAD - Retail Sales
US - Home Sales
Friday
US - Treasury Speech
UK - GDP
UK - Retail Sales
US - Home Sales.
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