Bank holiday Monday saw thinner trading volumes keep the pound range trading. Economic data this week has given the pound little support as indicators come out to the downside and raised concerns amongst investors that the economy in Britain was slowing and the risk of a potential second recession has increased. Initial data releases in the form of GfK consumer confidence came out better than expected but with limited market liquidity had little positive impact for sterling. Similarly mortgage approvals for July came out slightly better than expected but the increase was considered to be marginal and still pointed towards a sluggish housing market. Concern arises from the fact that the government is expected to begin implementing budget cuts fairly soon and with an already sluggish economy investors fear that reduced spending could exacerbate the slowdown and increase the risk of a second recession in Britain. Weaker data later on pushed the pound to the lows of the week versus the euro and the dollar although euro gains versus the greenback gave the pound the opportunity to cap losses. PMI manufacturing data in August dropped to 54.3 from the previous 57.3 while PMI services data fell to 51.3 from 53.1 in July. Nationwide house prices added to the pressure as prices fell 0.9% m/m in August, after the benign mortgage approvals figures risk aversion set in and saw the pound testing new lows across the majors.

Sentiment toward the Euro has recently seen a positive shift, economists’ main focus was the interest rate decision by the European Central Bank on Thursday but there was enough economic data to provide added support to the single currency. German economic data has recently pointed to a stabilisation of conditions within the Euro-zone’s largest economy. German unemployment and PMI manufacturing data remained unchanged at 7.6% and 58.2 respectively for the month of August. In addition to the ECB rate decision analysts awaited the release to revision to E.U. GDP Q2 data, growth for the second quarter  was revised up to 1.9% y/y while figures for the first quarter also saw upward revisions. The data boosted investor appetite for the Euro and pushed the single currency higher across the board.

The European Central Bank kept interest rate unchanged at 1.0% as expected. In the press conference ECB President Trichet maintained a fairly hawkish stance; on inflation central bank maintained price pressure would remain moderate over the medium term. Growth forecasts for 2010 and 2011 were both revised higher with the ECB’s monetary policy stance still considered by the governing council to be accommodative. The big question for economists was the central banks position regarding further monetary stimulus, something U.S. officials have recently been very vocal about. The ECB announced that it would be continuing with its refinancing operations until the end of the year. On balance this week has very much favoured the Euro, stronger economic data and a more optimistic central bank encouraged investor s to buy into the single currency.

The market continues to see indicators of a slowing U.S. economy which is keeping investors cautious on holding dollar denominated assets. The labour market is closely watched as an indicator of economic conditions and this week saw the release of two of the U.S.’s major employment indicators. The ADP employment report for August, indicated the U.S. had lost 10,000 jobs which furthered the opinion that the recovery in the Sates had slowed. The dollar responded accordingly pulling lower across the board. In contrast to this the Non-farm payrolls, the more influential of the two releases, showed considerably fewer jobs had been lost over the same period. Analysts had expected a figures of -100K against the actual release of -54K which allowed the dollar to strengthen briefly.

The lack of interest in the dollar could very well be attributed to the release of the Fed minutes earlier in the week. The Fed assessment of economic conditions was considered to be fairly dovish; growth was likely to remain modest in the near term although expectation for 2011 was for an improvement in GDP levels and employment and inflation were expected to fall short of desirable levels. There has been a lot of discussion regarding further stimulus requirements to support the ailing U.S. economy, on the issue to added liquidity the Fed left the door open for further quantitative easing by saying it would consider further stimulus should the economic outlook weaken “appreciably” for the United States.

Next Week

The weaker U.K economic data recent to the market last week will place the Bank of England’s rate setting meeting into sharp focus this week. Confidence in the pound has been shaken and investors are likely hoping for some commentary from the central bank regarding any potential further action. The few scattered pieces of fundamental data will certainly not be ignored as economists look for clarity on whether fears of an economic slowdown and risks of a second recession are in fact justified.

Euro levels versus the dollar are likely to continue to influence sterling trade as sentiment towards the Euro-zone remains positive and questions remain over the stability of the U.S. economic recovery. Recent concerns of a U.S. economic slowdown have been spurred on by weaker fundamental data and a more dovish assessment of conditions by the Fed, jittery markets will make it difficult to change opinion which is unlikely, given the lack of U.S. data this week.

Economic Data