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Currency update, August 16: sterling given downbeat assessment

Published:  16 August, 2010

It was an interesting week last week for sterling after the Bank of England's quarterly inflation report gave a downbeat assessment of the UK's prospects over the next two years.

EURO/GBP - 1.216
US$/GBP - 1.555
CHF/GBP - 1.618
CAN$/GBP - 1.619
AUS$/GBP - 1.748
ZAR/GBP - 11.386
JPY/GBP - 133.54
HKD/GBP - 12.091
NZD/GBP - 2.218
EURO/US$ - 1.278
HUF/GBP - 341.87

After a lot of positive sentiment following the new coalition government and the emergency budget over the last 3 months, the Bank of England's Monetary Policy Committee put a dampener on things by slashing their growth forecasts and inflation expectations. Sterling suffered against the US dollar as a result and many are expecting sterling to hit $1.55/£1 or lower in the next few weeks. Sterling performed well against the euro after concerns over euro zone sovereign debt hurt the single currency. The big data out this week in the UK is the release of the minutes of the Bank of England's most recent meeting which, given the tone of the inflation report, could add to sterling's recent decline. Housing data has shown that house prices dropped by 1.7% in August. This is the largest decline in 8 months.

In the euro zone, German GDP came in much stronger than expected last week posting figures of 2.2% against an expectation of 1.3% initially boosting the euro. However, towards the back end of the week, a poor Italian bond auction left the euro struggling. Demand was a lot lower than expected for the Italian debt, and as a result, investors became concerned over the risk of sovereign default in the region and as a result the euro fell to a 6 week low against sterling. Out later today, there is year on year CPI inflation data, which is expected to show an increase of 1.7%.

In the USA, last week saw the Federal Reserve vote to add further funding to boost the economy. As a result, risk aversion came back to the fore and there is strong demand for the safe haven US dollars despite major concerns over the US economy. Now might be a good time to secure prices to stop the market moving further against you as some analysts are predicting a return to the $1.40s. In the meantime, many analysts expect a move to $1.5505/£1 which is a key technical average of the last 200 day's worth of price movement and an important signal for many.

Elsewhere, Australian motor vehicles fell 2.6% - the third consecutive decline, and many have linked this to the increased borrowing costs that have come from the 1.5% rise in interest rates. New Zealand's services sector posted figures showing that the sector was expanding at the slowest level for 10 months.

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