New Year unease for Sterling

The Pound began 2010 with declines against every other major currency as political tensions and concerns over deteriorating UK public finances befell Sterling. Political uncertainty is rarely good news for a currency, and an attack on Gordon Brown.s leadership by two rebel MPs sparked some jitters amongst Sterling investors. Separately, PIMCO, the world.s largest investor in bonds, confirmed that it was cutting back its holdings of UK government debt, signalling growing investor unease over the extent of UK borrowings needing to be financed.

With the Bank of England (BoE) making no changes to UK interest rates or its Quantitative Easing programme, Sterling found some support against most currencies over Thursday and Friday. The BoE.s statement confirmed that it will take a further month to complete its £200bn target of asset purchases, suggesting that the February meeting (when its Quarterly Inflation Report will also be available) will be an important date in the calendar for a key decision to be made.

The economic outlook remains uncertain; whilst mortgage approvals and manufacturing activity rose, the Nationwide.s consumer confidence measure fell by the most in more than a year.

International trade balance data (Tuesday) could benefit the Pound if the deficit narrows more than anticipated, which would suggest that exports might have picked-up in the final quarter of 2009. Industrial production data, an indicator of economic activity, are scheduled for release on Wednesday.

US Dollar (USD)

Alongside most other major currencies, the US Dollar gained ground against the Pound from the beginning of last week. The GBP/USD rate hit intra-week lows below 1.59 on Thursday. The latest manufacturing data was stronger than expected, although this was countered by more disappointing service sector data.

The minutes of the US Federal Reserve.s recent policy meeting offered little in the way of support to the US Dollar, with policy members remaining cautious over the economic outlook. This cautious stance was vindicated by a higher than expected fall in non-farm payrolls, as employment slumped by 85,000 in December. This weakened sentiment towards the US Dollar on Friday, enabling the Pound to rise back above the US$1.60 level.

The GBP/USD rate closed at 1.6020, down 0.88% from 1.6162 a week earlier, benefiting those converting US Dollars into Sterling.

US retail sales data (Thursday) and consumer price inflation data (Friday) could underpin US Dollar support this week if stronger than expected, although the US Dollar.s performance remains likely to be heavily influenced by trends in investors. risk appetite.

Euro (EUR)

After starting the week well in to the 1.12-1.13 range, the Pound soon gave up ground against the Euro. German unemployment data were encouraging, showing an unexpected 3,000 fall in the number of jobless in December. The Euro zone inflation rate increased to 0.9%, from 0.5% previously, in line with expectations.

However, persistent unease over Euro-zone structural weakness continued as fears over further credit rating downgrades hampered the Euro.s performance against many of its other global peers.

The GBP/EUR rate closed the week down 1.38% at 1.1123, from 1.1279 a week earlier, benefiting those converting Euro into Sterling.

The European Central Bank will announce its latest interest rate decision on Thursday. Whilst no change is widely expected, the Euro could lose some support if the accompanying commentary suggests that interest rates could remain low for longer than presently expected. Other announcements include Euro zone Industrial Production data (Wednesday) and German Consumer Price Index figures (Thursday). Canadian Dollar (CAD)

The Canadian Dollar advanced steadily against the Pound over the earlier part of last week, gaining ground as global commodity and oil prices lifted. The key domestic data release was Friday.s employment data, revealing that the economy shed 2,600 jobs in December . contrary to market expectations that 20,000 jobs could have been created. However, more than 33,000 jobs were added in the final three months of 2009 overall. Although the GBP/CAD rate rose more than one cent shortly after the data, the Canadian Dollar later recouped some of its losses to close the week higher against Sterling.

The GBP/CAD rate closed down 3.01% at 1.6493, from 1.7004 a week earlier, benefiting those converting Canadian Dollars into Sterling.

With a light economic calendar this week, one notable release being Tuesday.s international trade data, global trends such as oil prices are likely to provide a primary influence over the Canadian Dollar.s performance.

Australian Dollar (AUD)

Stronger commodity prices and investors. buoyant appetite for risk enabled the Australian Dollar to post sharp gains against the Pound last week. The GBP/AUD rate fell as low as 1.73 on Thursday before attempting a modest recovery on Friday. Gains were made despite Australian manufacturing contracting for the first time in five months in December, suggesting that the Reserve Bank of Australia might slow the pace of interest rate rises following three successive hikes during the final quarter of 2009. However, the domestic outlook was brightened by stronger than expected retail sales data.

The GBP/AUD rate closed at 1.7317, down 3.81% from 1.8002 a week earlier, benefiting those converting Australian Dollars into Sterling.

December's employment report is the key data scheduled for release this week (Thursday). The Australian Dollar could benefit if employment gains are stronger than expected, further improving the domestic outlook.

New Zealand Dollar (NZD)

The New Zealand Dollar surged to its highest level against Sterling since October, with the GBP/NZD rate trading at lows under 2.16 on Thursday last week. The New Zealand Dollar was supported by stronger commodity prices, which are typically beneficial to New Zealand.s export earnings. Optimism surrounding domestic economic prospects was boosted by confirmation of New Zealand.s lower than anticipated trade deficit in November, as exports declined at a slower pace than imports.

The GBP/NZD rate closed at 2.1729, down 2.39% from 2.2261 a week earlier, benefiting those converting New Zealand Dollars into Sterling.

With a relatively light domestic data calendar this week, which includes business opinion survey data on Monday, global influences such as commodity prices trends and investors' risk appetite levels should continue to remain important for the New Zealand Dollar's performance.

South African Rand (ZAR)

The Rand generally took its cue from international developments in an absence of major domestic economic data, with support underpinned initially by higher gold prices and buoyant global stockmarkets. The GBP/ZAR rate fell to intra-week lows under 11.65 on Tuesday, but Sterling pared some losses against the Rand over the latter part of the week. On the domestic front, the South African Central Bank.s gold and foreign currency reserves fell by the most for fourteen months in December, as gold prices fell and the US Dollar strengthened.

The GBP/ZAR rate closed at 11.744, down 1.37% from 11.907 a week earlier, benefiting those converting Rand into Sterling.

Manufacturing production data (Tuesday) and mining production data (Thursday) will offer a gauge of activity levels in these sectors during November, although the Rand's performance this week is also likely to depend on trends in global commodity prices and levels of investors. optimism.