Following on from last week, the Pound retreated sharply through the course of the week to lows near 1.5950, as risk aversion stoked demand for the U.S currency. Although the Pound did make a move towards 1.12 versus the Euro towards the end of the week, the general tone was defensive, as the UK currency slipped to a fresh record low against the Australian Dollar.
Escalating concerns surrounding the UK banking sector weighed on Sterling, while the wider deterioration in risk appetite boosted demand for the safest assets. The Pound was unable to derive support from an unexpected 1.2% gain in the Halifax house-price index for June, as underlying confidence in the UK economy remains weak.
On Tuesday, the Pound strengthened against the Euro and the U.S Dollar, after a report showed that a measure of UK service sector growth exceeded initial forecasts in June, alleviating concerns about the recovery and the prospect of a contraction. Sterling had advanced against all but one of the 16 most actively trading currencies but sentiment remains weak and the Pound sold off through Wednesday.
The plethora of negative economic data in the UK at present means that any positive news is supportive to the Pound, as the UK currency challenged resistance levels in the region of 1.1270 against the Euro by Friday. The Pound has declined this year against 12 of the 16 major currencies, as the government's austerity measures weigh on growth, while the fastest pace of inflation since the 1970s squeezes household income.
Barclays Capital has reduced its forecasts for the Pound, citing "very disappointing" economic growth. The bank now expects the Pound to drop to 1.0750 against the Euro, from an earlier forecast of 1.1235, before slipping towards 1.0526 in three months time. The worsening economic outlook has also prompted traders to reduce bets that the Bank of England will raise interest rates before May 2012.
A report from the British Retail Consortium showed that UK shop prices accelerated last month at the fastest pace since October 2008, while wage growth remains relatively subdued. Rising commodity prices and a decline in the value of the Pound has also boosted inflation. Retail prices rose 2.9% from a year earlier, after advancing 2.3% in May.
The Pound remained lower against the majority of the 16 most actively traded currencies on Friday, after the Bank of England left interest rates on hold at a record low of 0.5% and there are few signs that the MPC would be willing to raise with the UK economy in a fragile state. The BoE also maintained its bond purchase program to help boost the recovery but there was no increase in the plan, which will tend to boost the Pound.
Some policy makers have made comments that suggest further quantitative easing may be on the table during the third quarter, as the government cuts and high inflation weigh on growth. The Pound also struggled to gain momentum following reports that UK manufacturing rose at the fastest pace in over a year in May.
Although manufacturing has driven the recovery away from contraction this year, recent data has suggested that output growth may be slowing in the face of the government cuts, while rising prices curtails consumer confidence and weakens global demand. The Pound actually rallied against the Euro, testing resistance just above 1.12, after the ECB raised interest rates in the Euro-zone.
In the three months through May, manufacturing declined 0.2% from the previous quarter, while industrial production fell 1.5%, which suggests the sector will hamper growth in the second quarter. According to a report yesterday from the National Institute of Economic and Social Research, the UK economy probably expanded just 0.1% between April and June following its 0.5% in the previous monthly report.
The report may provide an insight to the official second quarter growth figures, which are released later this month. The first quarter growth rate just about wiped out the fourth quarter contraction from last year and early indications are that the economy expanded at an even slower rate in the three months to June, raising concerns of a contraction.
The Pound remained under 1.60 against the U.S Dollar on Friday, trading in a tight range with lows towards 1.5960, despite UK stocks rising 0.9% in London. Short-Sterling futures still suggests that the central bank won't raise rates until May 2012 but any suggestions that a rate increase may happen this year will tend to strengthen the Pound.
The Pound rallied to a high of 1.6080 against the U.S Dollar on Friday afternoon, after the monthly U.S employment report was much weaker-than-expected, as the economy added just 18,000 jobs to payrolls in June following a revised 25,000 increase the previous month. Unemployment also rose to 9.2% from 9.1% and the data renewed fears surrounding the U.S economy and spark further speculation that the Federal Reserve will embark on further quantitative easing.
The focus this week in terms of economic data will certainly be the monthly inflation figures on Tuesday and the CPI rate is expected to remain unchanged at an elevated level of 4.5% in June. Elsewhere, the labour market data will also be watched closely and another increase in the level of claimant count unemployment is expected with the jobless rate unchanged at 7.7%.
So maybe time to use your forex and transfer money into some cheaper investments.
