Mixed week for sterling

Published: 27 July, 2012

A mixed week saw sterling reach fresh 2.5 year highs of €1.2875/1 against the euro before weakening off after global risk appetite increased and appalling UK GDP data was released which saw sterling strengthen by nearly 2.5 cents against the US dollar yesterday.

Currency Rates

This week - (Last week)
EURO/GBP 1.2758 - (EURO/GBP 1.2798)
US$/GBP 1.5675 - (US$/GBP 1.5692)
CHF/GBP 1.5328 - (CHF/GBP 1.5379)
CAN$/GBP 1.5828 - (CAN$/GBP 1.5822)
AUS$/GBP 1.5042 - (AUS$/GBP 1.5082)
ZAR/GBP 12.9145 - (ZAR/GBP 12.8625)
JPY/GBP 122.72 - (JPY/GBP 123.31)
HKD/GBP 12.1620 - (HKD/GBP 12.1713)
NZD/GBP 1.9532 - (NZD/GBP 1.9561)
SEK/GBP 10.7591 - (SEK/GBP 10.8936)
AED/GBP 5.7545 - (AED/GBP 5.7626)
US$/EURO 1.2278 - (US$/EURO 1.2254)
INR/GBP 86.95 - (INR/GBP 86.54)

The preliminary GDP figures showed that the UK's economy contracted by 0.7% when only 0.2% had been anticipated making it the longest "double-dip" recession for 50 years. Some economists feel the figures are likely to be inaccurate whilst others hope the Olympics will help growth in the short term; however, irrespective of both of these factors the fundamental problems still remain and the UK's economy is extremely weak. With very little data out from the UK today, the markets will look to the US and to news from Europe for influence.

The euro had an extremely poor start to the weak reaching historic lows against a raft of currencies before rebounding in the later stages following comments made by the European Central Bank (ECB) President on Thursday. The ECB President stated that the "ECB is ready to do whatever it takes to preserve the Euro" and hinted towards more bond buying to drive down the yields on sovereign debt. Following these comments, yields on Spanish and Italian bonds dropped with Spanish bond yields falling below the 7% mark for the first time this week. The markets also reacted positively on Wednesday following one of the members of the ECB suggesting giving the proposed European Stability Mechanism (ESM) a banking license would go some way to help the European debt crises. Earlier in the weak the markets had been extremely risk adverse with fears that Spain may need a full international government bailout and worries over Greece's ability to convince its creditors that it had done enough to deserve its next tranche of fund of €31.5b. Despite the comments from the President of the ECB, these fears still remain and we will have to see how the situation develops in the up and coming weeks. On the agenda today, German inflation data and Spanish unemployment data will be released.

The US dollar performed well in early part of this week as investors continued their flight to safety in such uncertain times; however, as confidence in Europe gathered pace the dollar weakened off sharply against the majority of currencies. A raft of bad data released this week did little to help confidence in the US which included figures showing the number of new homes sold and the number of homes pending sale both dropping sharply in the previous month. Manufacturing PMI data was slightly worse than expected whilst the Richmond Manufacturing Index was much worse than anticipated. Finally core durable goods orders fell by 1.1%. On a slightly more positive note, the number of people claiming unemployment benefits for the first time dropped by much more than originally forecast. Out today, advanced GDP data is released which is expected to have dropped to 1.5%; but, this reading would still be significantly stronger than the UK and much of Europe.

Elsewhere, the Japanese yen performed well at the beginning of the week due to its safe haven status before weakening off as global risk sentiment shifted. The Reserve Bank of New Zealand voted to keep interest rates on hold at 2.5% as was widely anticipated, whilst Chinese manufacturing PMI was marginally better than expected providing some slight relief to the markets. Japanese retail sales figures and inflation data was released overnight and economic confidence figures from Switzerland will be released first thing this morning.