UK interest rates take center stage

After a tough week for sterling there was a largely positive end to the week which saw sterling make marginal gains against the euro whilst holding ground against a resurgent US dollar. With little UK economic data, sterling was able to make slight gains against the euro as both French and German manufacturing data missed expectations in the morning.
Speculation over whether the UK or US will next raise interest rates is set to dominate currency markets over the coming months. Although there is no rate decision due from the Bank of England (BoE) this week, the release of preliminary economic growth figures on Tuesday will provide insight into how the UK economy has performed over the past quarter and year. Expectations are for an improvement over the last quarter and steady growth for the twelve months. Importantly, this will give an early indication of what pressure there will be on the BoE to raise interest rates in the near term.
Aside from this, we are set for a quiet week for the UK, with only housing inflation data and some further consumer confidence figures to provide support.

Will the euro stabilize this week?
After a choppy week, the euro remained relatively steady throughout Friday. French and German Flash Manufacturing Purchasing Managers’ Index (PMI) data were reported to be lower than forecast, but their effects on the euro was muted.
The key highlight of the week was the Greek government passing the reforms attached to their third bailout package. Today we expect negotiations to begin between Greece and its creditors ahead of Aug. 20, when the country is due to repay 3.4 billion euros to the European Central Bank (ECB). Depending on the outcome of these talks, we are likely to see euro fluctuations.
On Thursday Preliminary German Consumer Price Index (CPI) data is released, a measure of inflation. Following on from poor manufacturing data released from Germany last week, it will be interesting to see the outcome of this inflation data.

US central bank statement to take the spotlight
Friday afternoon’s positive Market Manufacturing Purchasing Managers’ Index (PMI) data created a bullish movement for the US currency. However, this was short-lived thanks to a poor data release in the form of disappointing New Home Sales figures, which pulled rates back to the levels we saw for most of last week.
This week, we look forward to Core Durable Goods Orders data today, consumer confidence data on Tuesday, as well as growth and unemployment claims figures on Thursday. The main event, however, will be the Federal Open Market Committee (FOMC) statement on Wednesday evening. Investors will be studying the language used by the central bank for clues to future changes in monetary policy.

Similar fortunes for Australian dollar and Japanese yen
Last week the Australian dollar ended with a whimper as it hit a fresh eight-year low. Now trading comfortably over the 2.1 mark, the currency continues to weaken — by 16 percent against the pound since the start of the year. This week there are important data releases starting on Thursday, when Reserve Bank of Australia (RBA) Gov. Stevens speaks. Economists will be listening for any hints of when interest rates will be changed, as this can often cause fluctuations in the market. The quarterly Producer Price Index (PPI) is released on Friday and Australia will be hoping for some positive results or risk following the continuing trend Down Under.
It’s been similar fortunes for the Japanese yen as it hovers around an eight-year low against sterling. This week is a busy one for the Japanese economy, with several data releases. However, very few carry much importance and it may be the retail sales figures on Wednesday that carry most weight. It is more likely that key events from other nations will have a stronger bearing on the currency.

— Charles Purdy, director of Smart Currency Exchange.