Merger and Acquisition activity, risk aversion and political uncertainty saw the pound lose 3% of its value and pushed the currency to a 10 month low against the dollar. The UK firm Prudential announced that it would be purchasing the Asian operation of AIG for an estimated $35bln suggesting a large sell off of pound was eminent, against the euro sterling fell to a 3 month low on the back of weaker economic data. UK Mortgage approvals came out at 48.2K, consensus forecast had been for a drop to 50K from 58.2K, PMI manufacturing came out in line with the prior months release due to a downward revision in the January numbers and was therefore had a negative impact on the pound. General elections in the United Kingdom are scheduled to occur this year and political posturing is likely to periodically impact on the pound. In recent months markets have become comfortable with the fact that the conservative party was virtually assured a victory but recent revelations regarding one of its major donors cast doubt over the outcome of the elections and raised concerns over the possibility on a hung parliament, which given the struggling UK economic recovery would certainly not be in favour of market stability.

One last factor that had a negative impact on sterling was the debt crisis in Greece. The UK’s debt is on par with Greece equalling 12% of GDP and being on the periphery of the Euro-zone the market concerns over Greece’s position spilled over to the UK.

 The pound spent the remainder of the weak reclaiming the initial losses as focus switched the Bank of England’s MPC meeting on Thursday. A sharp rise in oil prices and better economic data in the form of positive PMI services figures provided solid support ahead of the BoE meeting. The Bank of England kept interest rates on hold at 0.5% and made no changes to its £200bln Asset Purchase Scheme in line with market expectations. The pound appreciated ahead of the announcement and held its gains, general opinion being that the central bank has recognised it was still faced with a high level of uncertainty about the economic recovery and mixed economic data. Sterling concluded the week holding fairly steady at the levels achieved on Thursday until a rally in the pound after the release of US employment data boost the currency to fully recover its earlier losses.

The dollar continues to benefit from buying demand as safe haven flows remain steady. The acquisition gains made after the announcement by Prudential that it would be purchasing AIG’s Asian operations gave the greenback a solid start although these gains were given up in part after news the deal may not complete hit markets. Further pressure to the dollar came from a sharp appreciation in oil prices after the release of US gasoline reserve figures which showed inventories were higher than forecast and could reduce future demand.

Economic data for the United States was mixed and created a great deal of volatility, particularly in the EUR/USD currency cross. ISM manufacturing data dropped to 56.5 from 58.4 while construction spending improved to -0.6% against -1.2% the previous month. ISM Non-manufacturing data jumped to 53 from 50.5 which boosted the dollar as the figures point to an ever improving US economy, the services sector makes up the largest portion of the US economy.

The main event on the US calendar this week was the employment data. The ADP employment index came out n line with expectations showing a loss of 20K jobs in February while the weekly jobless claims dipped to 469K from an upwardly revised 498K. Both indicators pointed to the possibility of a better Non-Farm Payrolls number although analysts were expecting the number of jobs lost to increase in February.  The actual release of Non-Farm payrolls beat market expectations but despite this the dollar strengthened initially on the back of safe haven demand due to the fact that the labour market, which many feel is a benchmark for economic recovery, is still weak. The safe haven demand was short-lived though as confidence in the stability of the US economy encouraged traders to seek out higher returns.

It seems that the Euro just cannot escape out from under the Greece debt situation despite strong economic data. German data gave the single currency a strong start to the week against the pound, German PMI manufacturing data came out at 57.2 better than the 57.1 forecast. EU PMI manufacturing data follow suit posting similar gains. PMI services and retail sales data for both Germany and the Euro zone also showed improvement.

Despite these improvement 2 factor kept the euro pinned down. The first factor being the continued concerns over sovereign debt, Greece provided its strategy to cut its deficit this week which was received favourably and gave the euro some relief especially against the dollar. The second issue was the slightly dovish outlook from the European Central Bank. The ECB made no changes to its interest rates keeping rates at 1% as expected. Following the announcement ECB President Jean-Claude Trichet indicated the central bank considered interest rate levels to be appropriate under the present economic conditions. He went on to say that the governing council felt market conditions were returning ‘progressively to normal’ and so would reduce liquidity in the markets as needed although they will continue to provide unlimited liquidity on a weekly and monthly basis in the short-term. The fact the further liquidity would be considered without restriction weighed on the euro.

Next Week

After a period of significant volatility last week risk aversion will continue to play a major role in creating currency trends. Weaker US data has in recent weeks prompted investors to buy dollars and gold to secure their returns. The European Central Bank last week kept rate on hold at 1.0% and gave a mixed assessment of the Euro-zone economy so the ECB monthly report will be looked at closely to determine what the inflation and growth trends will be in the medium term and if inflation expectations will hint at higher interest rates in the near future. UK data has been mixed although housing data has recently suggested a continued improvement in that sector so the RICS house price index could provide some direction for sterling.

The debt crisis in Greece has eased somewhat last week but sovereign debt concerns are by no means a thing of the past. The UK’s debt position is equal to that of Greece being 12% of GDP so trade balance data on Tuesday is likely to be more of a market event than usual as traders wait to see if the deficit has eased or not.

For Asian markets the main event this week will be the Reserve Bank of New Zealand (RBNZ) rate decision and Australian unemployment figures. Australia raised interest rate last week by a quarter of a percent boosting most of the currencies in the region although the RBNZ is not expected to make any changes keeping rates on hold at 2.5%.

Economic Data Releases