Weekly Brief

Unshockable pound


There was no doubt which of the week’s UK economic data most captured the attention of the media. Wednesday’s first estimate of gross domestic product for the second quarter was the hottest topic ahead of its release, in anticipation that it would show the economy shrinking by 20.5% in Q2. It did just that: GDP contracted by a quarterly 20.4%, confirming that Britain’s economic shrinkage was by far the biggest among G7 countries (France was second worst at -13.8% and Japan fared best at -7.6%). However, it had been blindingly obvious for months that the GDP number would be a stinker, the analysts’ forecast were almost bang on, and the figure of 8.7% growth for June alone was evidence that the recovery was already under way.

Investors felt under no pressure to punish sterling for what had happened four months ago, and the news was met by a small uptick for the pound. After covering a range of ±0.5% it did eventually lose an average of 0.4% to the other major currencies but it did so with no sense of urgency.



An uneventful week for the euro kept it within ranges of ±0.5% against the GBP and USD. It strengthened by a quarter of a cent against sterling and lost that much to the dollar. Broadly, the EUR lost ground during the early part of the week and regained it later, in an apparently purposeless way.

With the emotive national second quarter GDP figures out of the way last week and the pan-Euroland measure expected to be confirmed at -12.1% later this Friday, there was little excitement to be had from the European ecostats. The two main themes were pries and sentiment. Italian consumer prices fell 0.2% in July, taking the standardised HICP inflation rate a tick lower from 0.9% to 0.8%. The equivalent measure from Germany was 0.0%, while wholesale prices were down by an annual 2.6%. On the confidence front, the Sentix index of investor sentiment in the Eurozone rose by 4.8 points to -13.4, in a fourth consecutive monthly improvement (its trough in April was -42.9). ZEW’s assessment of the same subject was equally positive, noting that “Hopes for a speedy economic recovery have continued to grow”.



After more than two months on the retreat the dollar has regained its composure in the early part of August. It did moderately well this week, strengthening by 0.1% against the other major currencies. The dollar took half a cent off sterling and a quarter of a cent off the euro. Economic data from the States tended to be positive, higher on the month, ahead of forecast or both. However, most of them had little relevance to dollar sentiment. That could not be said of the employment data that came out last Friday and this Thursday. Just about every component of the monthly US employment report was better than forecast. Average annual hourly earnings growth was almost unchanged and above forecast at 4.8% (inflation was last seen at 0.6%). Even the lower participation rate, down from 61.5% to 61.4%, was higher than the predicted 61.1%. There was also good news on weekly jobless claims, with initial claims coming in below a million for the first time in five months.

The principal issue at the moment for the US and the dollar is the inability of government to agree on a new fiscal stimulus package to replace the one which ran out at the end of July. There is a chasm between what the Democratic House of Representatives wants and what the Republican Senate is prepared to concede. The only thing everyone seemed to agree on is that the discussions are at an impasse.



The Canadian employment data came out at the same time as the US numbers last Friday. They, too, were mostly better than expected. Unemployment was down from 12.3% in June to 10.9% in July, a four-month low but still well above the 5% to 6% that prevailed in 2018-19. Just under 419k people found new or reactivated jobs. On any other day the data would probably have sent the Loonie higher. This time, however, the bigger, better and more important US jobs numbers put Canada in the shade and the CAD enjoyed only modest profits. It did well for the week as a whole though, taking second place behind the Norwegian krone with an average gain of 1.1%. The Loonie added three quarters of a US cent and went up by two and a half cents against sterling.

Other than employment, the only Canadian ecostats were the Ivey purchasing managers’ index and housing starts. The PMI was more than ten points higher at 68.5, a 26-month high. Housing starts were up by 16%, close to the highest level in eight years.



Neither of the antipodean dollars had a great week but the Aussie at least had a better run than its south eastern cousin, losing more than half a US cent and falling by two thirds of a cent against sterling. On average it was 0.7% weaker against the other major currencies.  The most important Australian economic data were Thursday’s employment numbers. They were better than expected, with almost 115k new (or reactivated) jobs and unemployment up by less than forecast at 7.5%, but they failed to energise the AUD. Business and consumer confidence measures from NAB and Westpac were actively unhelpful. Among companies, “confidence remains fragile” and “consumer sentiment collapses again” according to Westpac.

The most curious numbers related to inflation. Whilst the meagre 0.2% quarterly increase in wages was compatible with the Covid-19 lockdown and the -0.3% inflation rate in June, the Melbourne Institute Survey of Consumer Inflationary and Wage Expectations paints a wildly different picture. The person in the street expects inflation to rise to 3.3% within a year, a level not seen in nearly nine years.



For a third month in June, NZ visitor arrivals were down by more than 98% from the same month last year. That is what happens when you close the borders to keep out the pandemic. Electronic card retail sales, which have been all over the place in recent months, were close to normal levels after increasing by 1.1% in July. ANZ’s preliminary monthly Business Outlook described confidence as “teetering”, having fallen 10 points to -42.4%. The measure has not been above zero since autumn 2017.

On Wednesday the Reserve Bank of New Zealand’s Monetary Policy Committee kept its Official Cash Rate benchmark unchanged at 0.25% as expected. However, the MPC’s statement also revealed that the Large Scale Asset Purchase (LSAP) programme (quantitative easing) will increase by two thirds to $100 billion. Not only that; the committee has “a package of additional monetary instruments in active preparation [which] includes a negative OCR”. The prospect of negative rates was not helpful to the NZD, making it the weakest among the majors with an average loss of 1.9%. It lost one and a third US cents and fell by more than three cents against sterling.

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