UK growth flat, Sterling weakens

The Pound declined against most major currencies, including the Euro and US Dollar, with the UK economy producing its weakest growth performance since 1992. This fuelled expectations of an interest rate cut by the year-end. UK growth in the second-quarter was revised downwards from an earlier estimate of 0.2% to 0%, ending a run of 63 consecutive quarters of economic growth.

Despite the deterioration in the growth outlook, the minutes of the latest Bank of England interest rate policy meeting suggested that for the time being inflation remains a threat. The voting pattern showed a second consecutive three-way split; seven opting for no change, one member voting for a cut and one for an increase.

The Confederation of British Industry.s distributive trades survey on Thursday will be scrutinised for clues over the strength of retail spending, with consumer confidence data to follow on Friday. Sterling could come under further selling pressure if these reports undermine the outlook for the UK economy in the second half of the year.

Euro (EUR)

The Euro strengthened against Sterling, finding some support on better than expected economic data. The German ZEW economic business expectations survey showed some improvement in confidence towards the Euro zone economy. Euro zone manufacturing activity also increased slightly in August, although the service sector weakened further. The Euro found support on concerns over the inflation outlook, as annual producer price inflation in Germany reached a 27-year high of 8.9% in July.

The GBP/EUR rate closed down 1.35% at 1.2522, from 1.2693 a week earlier, benefiting those selling Euros to buy Pounds.

An estimate of Euro zone inflation in August on Friday will be the key data release this week, with the Euro likely to come under some selling pressure if confidence grows that inflation is nearing a peak.

US Dollar (USD)

The recent high volatility of the GBP/USD rate continued last week, although with less of a clear direction following its recent dramatic slide. The Dollar was undermined partly by a recovery in oil and gold prices, with which it tends to have an inverse relationship.

The housing data remained weak with home builders. confidence holding steady at the previous month.s all-time low, whilst housing starts (new construction) and mortgage applications declined sharply. However, the US Dollar gained some support on increased expectations that interest rates will rise in the coming year, as the Federal Reserve acts to constrain inflation. Data for July revealed an annual increase in producer prices of 9.8%, well above expectations.

The GBP/USD rate closed down 0.55% at 1.8542 from 1.8645 a week earlier, benefiting those converting US Dollars into Pounds.

The USD could find further support if the second-quarter Gross Domestic Product report (Thursday) and personal income/spending data (Friday) are better than expected.

Canadian Dollar (CAD)

The Canadian Dollar continued its advance against Sterling, with the GBP/CAD rate trading at a three-month low around 1.94. A sharp rebound in oil prices underpinned Canadian Dollar strength. Consumer price inflation and retail sales were in line with market forecasts, with rises largely driven by rising petrol costs, and therefore had little impact on Canadian Dollar performance.

The GBP/CAD rate closed at 1.9393, down 1.98% from 1.9785 a week earlier, benefiting those converting Canadian Dollars into Pounds.

After a small contraction in growth in the first-quarter, markets will scrutinise the second-quarter growth report on Friday. The Canadian Dollar could lose some support if Gross Domestic Product growth is lower than expected.

Australian Dollar (AUD)

The minutes of the Reserve Bank of Australia.s (RBA) latest interest rate policy meeting suggested that it may soon move to cut interest rates, noting that this may be required in order to prevent a deeper and more persistent economic slowdown. Despite the outlook for falling interest rates, the Australian Dollar found support from rising commodity prices, and strengthened overall as a result.

The GBP/AUD rate closed at 2.1337, down 0.74% from 2.1495 a week earlier, benefiting those seeking to convert Australian Dollars into Pounds.

With only relatively minor data releases this week, including the Conference Board Leading Index of economic activity (Thursday) and private sector credit (Friday), commodity price trends and investor risk tolerance are likely to remain important influences on Australian Dollar direction.

New Zealand Dollar (NZD)

The New Zealand Dollar advanced against the Pound, as recovering commodity prices improved the outlook for currencies which depend heavily on commodity export earnings. With Producer prices rising at their fastest pace in more than twenty years in the second quarter, a reduction in scope for aggressive interest rate cuts underpinned New Zealand Dollar strength.

The GBP/NZD rate closed 1.36% lower at 2.6071, benefiting those converting New Zealand Dollars into Pounds.

The outlook for business conditions in New Zealand will be scrutinised on Wednesday, with the New Zealand Dollar likely to benefit if business confidence is higher than expected.

South African Rand (ZAR)

The South African Rand strengthened against Sterling for a second consecutive week, benefiting from a strong rebound in gold and platinum prices. South Africa is a major exporter of precious metals and the Rand tends to perform strongly when prices rise. Economic growth in the second quarter was stronger than expected, driven largely by an improvement in mining and manufacturing performance, also underpinning support for the Rand.

The GBP/ZAR rate closed down 3.32% at 14.204, benefiting those converting Rand into Pounds.

Consumer price inflation (Wednesday) and producer price inflation (Thursday) data may support the Rand if higher than expected. The labour market survey for the first half of 2008 (Thursday) will also be closely watched.