Sterling falls to 12-year low

Tough times for Sterling continued with the Pound declining to a 12-year low against a trade-weighted basket of currencies last week. Although consumer confidence improved slightly in August, it remains at a historically weak level as the UK housing market shows little sign of stabilisation. The Nationwide Building Society reported a tenth consecutive monthly fall in house prices in August, with an annual decline of 10.5%, whilst mortgage approvals remained near to last month.s record low.

Sentiment towards the Pound also tumbled as several policy officials sounded warnings over the health of the economy. The Bank of England.s (BoE) David Blanchflower, a member of the Monetary Policy Committee, warned that aggressive interest rates cuts are now needed to avoid a prolonged slump and spiralling unemployment. The Pound continued to fall on Monday following comments in the Guardian newspaper from Chancellor Darling that the UK faces its worst downturn in 60 years.

The BoE's interest rate policy announcement is on Thursday this week. With inflation unlikely to have peaked, the market presently expects the majority to vote for a no-change decision. However, the Pound could lose further support if expectations of future interest rate cuts are raised.

Euro (EUR)

Sterling held relatively steady against the Euro in the early stages of the week. The view that the slowdown in the Euro zone economy could become more severe than previously anticipated was given further weight after the German Ifo Business climate index fell to its lowest level in three years. Consumer confidence in Germany also deteriorated to a five-year low.

The Euro advanced against the Pound over the second half of the week. This was despite Euro zone inflation falling to 3.8% in August from 4% in July, its first decline since March. This raised speculation that interest rates will fall in the coming months. However, several European Central Bank (ECB) officials appeared to play down this prospect, lending some support to the Euro.

The GBP/EUR rate closed down 0.98% at 1.2399, from 1.2522 a week earlier, benefiting those selling Euros to buy Pounds.

The ECB will announce its latest interest rate policy decision on Thursday. A rise would typically offer support to the Euro, although the weaker economic data has reinforced expectations that interest rates will remain on hold this time around.

US Dollar (USD)

The US Dollar rose against Sterling for a sixth consecutive week, with the GBP/USD rate trading at its lowest level in more than two years. The Dollar drew support from a pick-up in home sales in July, improved consumer confidence to a three-month high, and stronger orders for durable goods. A strong exports performance contributed to a much faster than expected pace of economic growth, with the economy growing at an annualised 3.3% in the second quarter.

The GBP/USD rate closed down 1.87% at 1.8202, from 1.8542 a week earlier, benefiting those converting US Dollars into Pounds.

The key release this week will be the non-farm payrolls report on Friday. An eighth consecutive fall is expected, although the US Dollar could benefit if the fall in employment is lower than anticipated.

Canadian Dollar (CAD)

The Canadian Dollar continued to make ground against Sterling, making its strongest gains as oil prices rose. Prior to the economic growth report on Friday, the GBP/CAD rate had reached lows around 1.9150. However, growth in the first half of the year was significantly weaker than expected, raising speculation of a further interest rate cut and undermining some support for the Canadian Dollar.

The GBP/CAD rate closed at 1.9333, down 0.31% from 1.9393 a week earlier, benefiting those converting Canadian Dollars into Pounds.

If the Bank of Canada keeps interest rates on hold at 3% on Wednesday, as the majority of analysts presently expect, the decision could provide further support to the Canadian Dollar.

Australian Dollar (AUD)

The Australian Dollar advanced against Sterling for a third consecutive week, despite economic data reinforcing expectations that interest rates will be cut this week. The value of construction work in the second-quarter fell by 2.6%, whilst sales of new homes fell to a two-year low and consumer lending posted its largest monthly decline since 1992. The Australian Dollar was boosted by stronger than expected business investment, which could have a positive impact on growth.

The GBP/AUD rate closed at 2.1241, down 0.45% from 2.1337 a week earlier, benefiting those seeking to convert Australian Dollars into Pounds.

Key announcements this week include the Reserve Bank of Australia.s interest rate decision on Tuesday and the second-quarter economic growth report (Gross Domestic Product) on Wednesday.

New Zealand Dollar (NZD)

The GBP/NZD rate advanced early in the week to highs above 2.66, but Sterling.s gains had been eroded by the end of the week. The New Zealand Dollar found some buying support after the National Bank of New Zealand.s Business Outlook survey revealed an improvement in business confidence in August.

The GBP/NZD rate closed 0.22% lower at 2.6013, benefiting those converting New Zealand Dollars into Pounds.

The ANZ bank.s Commodity Price Index is released on Wednesday. The New Zealand Dollar could find further support if the index is higher than expected, since higher commodity prices may be expected to increase New Zealand.s export performance.

South African Rand (ZAR)

The South African Rand advanced against Sterling, with the GBP/ZAR rate trading at lows under 14.00 for the first time since January. The Rand gained on higher than expected consumer price and producer price inflation, as well as a decline in the unemployment rate. Gold prices also rose over the week, benefiting the Rand, since South Africa is a major gold exporter.

The GBP/ZAR rate closed down 1.46% at 13.997, benefiting those converting Rand into Pounds.

The South African Reserve Bank.s Quarterly Bulletin, released on Thursday, will be scrutinised for indications of how the central bank currently views the latest domestic economic developments.