Sterling mixed ahead of UK interest rate decision

3 March 2009

Last week saw global markets coming under sustained pressure from a range of poor economic data and a worsening outlook. UK consumer confidence edged higher in February, but it provided little cheer for sterling, which spent most of the week in the doldrums before rallying late on Friday.

Amid further announcements of continuing UK job cuts and banking sector losses, figures from Nationwide showed house prices in the UK dropped more than expected in January, whilst the British Bankers Association confirmed mortgage approvals were 43% lower than a year ago. The second reading of UK Gross Domestic Product for the final quarter of 2008 confirmed that the economy shrank by 1.5%, the worst quarterly performance since 1980. Reported comments from Bank of England (BoE) officials were also generally downbeat, and hindered the Pound.

Thursday's BoE interest rate announcement is the key release this week, with a further cut of up to 0.5% expected. However, the minutes of the previous meeting revealed a request to use more unconventional measures to stimulate the economy, coupled with unease that bank profitability could be further impeded by interest rates moving closer to zero. In light of this, there is greater uncertainty regarding the outcome of this week's meeting and therefore Sterling exchange rates are likely to remain very volatile.

Euro (EUR)
The euro advanced against sterling over the first half of last week, with the GBP/EUR rate trading at an intra-week low below 1.115 on Wednesday. This was despite the German business climate index falling to record lows and confirmation that the eurozone's largest economy contracted 2.1% in Q4 2008.

However, these gains were reversed later in the week, with fears over the exposure of member states to the Eastern European economies again weighing on the euro despite an announced €24.5bn rescue package for the region. The eurozone inflation rate eased sharply in January, whilst the unemployment rate edged up to a two-year high.

The GBP/EUR closed at 1.1293, up 0.41% from 1.1247 a week earlier, benefiting those converting sterling into euros, and so people buying property in the eurozone.

The European Central Bank's (ECB) interest rate announcement is scheduled for Thursday, with expectations currently finely balanced between a 0.25% or 0.5% cut. The euro could find further support if any reduction is less aggressive than expected, or if the ECB's commentary suggests future interest rate cuts may not be forthcoming.

US Dollar (USD)
Economic activity fell more sharply than expected, with the revised estimate of Gross Domestic Product declining by 6.2% in the final quarter of 2008. Prior to this data, released on Friday, the GBP/USD exchange rate was trading at an intra-week low and Sterling was unable to pare earlier losses against the US Dollar despite the subsequent rally.

In comments to the Senate Banking Committee, US Federal Reserve Chairman Bernanke dampened fears of bank nationalisations and offered his views that a US recession could end in 2009. Falling consumer confidence, housing sales, capital spending and rising jobless claims, suggest little sign of improvement. Overall, US Dollar direction was closely associated with investors' confidence levels, making the strongest gains as global economic fears intensified.

The GBP/USD rate closed down 0.82% at 1.4311, from 1.4429 a week earlier, benefiting those converting US dollars into sterling, impacting on those buying property in USA.

February's non-farm payrolls report on Friday is expected to confirm the highest monthly US job losses in more than 50 years. The US Dollar could weaken if the labour market outlook is worse than feared and undermines expectations that an eventual US economic recovery could occur sooner than in other major economies.

Canadian Dollar (CAD)
A much bigger than expected decline in Canadian retail sales in December, revealed last Monday, enabled the pound to rise against the Canadian dollar. Thereafter, the sterling/Canadian dollar rate declined largely owing to the pound's weakness, with the fall stemmed only momentarily by data showing that Canadian investment spending is being heavily curtailed. However, the GBP/CAD intra-week high was reached on Friday after the pound rallied strongly, with gains given further impetus by worse than expected Canadian international trade data.

The GBP/CAD rate closed up 1.13% at 1.8265, from 1.8061 a week earlier, benefiting those converting Sterling into Canadian Dollars, and buying property in Canada.

The Bank of Canada interest rate decision on Tuesday is the key release this week, with consensus expectations favouring a 0.5% cut to 0.5% given the weakness of recent data.

Australian Dollar (AUD)

The Australian dollar rose against sterling over the early part of the week, with direction largely dictated by investor sentiment trends, gaining mid-week as global stockmarkets rallied following earlier falls.

However, these gains were pared on Friday, after Japan (one of Australia' s biggest trading partners) revealed a record monthly drop in industrial production. A small rebound in Australian bank lending in January appeared insufficient to significantly improve the near-term outlook for the economy.

The GBP/AUD closed at 2.2395, up 0.15% from 2.2362 a week earlier, slightly benefiting those converting sterling into Australian dollars, and buying property in Australia.

The Reserve Bank of Australia's interest rate announcement is scheduled for Tuesday, with a cut of at least 0.25% widely anticipated. The Gross Domestic product report on Wednesday is expected to confirm that the economy still managed to expand in the fourth quarter of 2008, with the Australian dollar likely to benefit if economic growth remained more resilient than expected.

New Zealand Dollar (NZD)

The New Zealand dollar initially strengthened against the pound last week, but was unable to maintain these gains as sterling rallied on Friday. The January trade deficit narrowed to its lowest level in eight years, emphasizing central bank Governor Bollard's later comments that the weakening New Zealand dollar is helping exporters to become more competitive. Although the National Bank Business outlook survey remained downbeat - with a 6% increase in the proportion of businesses expecting worse conditions over the next year - this had little impact on the New Zealand dollar.

The GBP/NZD rate closed at 2.8563, up 1.27% from 2.8206 a week earlier, benefiting those converting sterling into New Zealand dollars, and buying property in New Zealand.

In the absence of market-sensitive data releases this week, the New Zealand dollar is likely to take its direction from global stockmarket and investor risk tolerance trends ahead of next week's interest rate decision.

South African Rand (ZAR)
The South African rand was one of the strongest performing currencies last week, with most of its gains against the pound made during the middle of the week following domestic economic growth and inflation reports. Although the economy contracted in the final quarter of 2008 at the sharpest rate since 1992, this was close to market expectations. Inflation was higher than consensus expectations, easing fears over a near-term emergency interest rate cut, which benefited the rand.

The GBP/ZAR rate closed at 14.455, down 0.89% from 14.585 a week earlier, benefiting those converting rand into sterling, slightly increasing the cost of buying property in South Africa.

With little in the way of major data releases this week, rand direction is likely to be closely associated with global stockmarket and investor risk tolerance trends.