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The pound had mixed fortunes last week as positive news about the UK’s economic recovery from the Covid-19 pandemic was weighed down by a lack of progress in the talks for the future trading relationship with the EU.

Disappointing European PMIs and pessimism at a meeting of the Federal Reserve’s Federal Open Market Committee (FOMC) in the US meant the pound hasn’t lost or gained much ground overall on the dollar or euro, but currency rates did fluctuate throughout the week.

Signs of a UK recovery

The pound was supported by stronger than expected PMI and retail figures for the UK in July.

The IHS Markit Purchasing Managers' Index (PMI) – which measures output and employment in manufacturing and service companies – recorded 60.3 for the month, up from 57 in June and a seven-year high. Any score above 50 indicates growth.

Retail sales also rose 3.6% in July, up from the 2% forecast, while consumer prices climbed 0.4%.

UK-EU talks remain in deadlock

The UK presented a fresh draft free-trade agreement to the EU in an attempt to break the deadlock in trade talks on Thursday (20 August).

However, EU chief negotiator Michel Barnier said on Friday that, while the document was “useful” for understanding the UK’s position, it failed to comply with the EU’s red lines on ‘level playing field’ rules.

He was also adamant that any attempt to fast-forward the negotiations – ahead of current sticking points like fisheries and travel rights for British truckers across the EU – would be rejected.

UK negotiator David Frost said the UK did not expected the text to be discussed this week, but he hoped the draft could “inject a spark” into the process.

Pound steady against the euro

Despite the lack of progress in the talks, the pound as steady against the euro, gaining in value from 1.103 to 1.113 by the end of Friday, having peaked at 1.1175 earlier that day.

EU manufacturing disappoints

The steady pound-to-euro rate was possibly due to lower than expected PMIs for the EU, with its manufacturing sub-index scoring 51.7 against an expected 52.6. Continuing fears of a second wave of the coronavirus in Europe have also kept the euro steady against the pound.

Considerable risks for the US

Minutes from the FOMC meeting on Wednesday highlighted the “considerable risks” posed by the Covid-19 pandemic to the US economy over the medium term.

The FOMC is the monetary policy making body of the US’s Federal Reserve which meets roughly eight times a year. At each meeting it issues a policy statement, summarising its economic outlook and any key policy decisions.

The minutes at the latest meeting indicated that further quantitative easing is being very carefully monitoring. The FOMC provided little clarity on the Fed’s next move to support the virus-hit economy.

Volatility in pound vs dollar

Pessimism from the FOMC and a lack of progress in the UK-EU talks therefore created volatility between the pound and dollar. The pound started the week at 1.310 before rising to 1.325 by Wednesday.

Once it became apparent that the UK-EU talks were once again stalling on Friday, the pound was down to 1.308.

Steady week for Oil

Oil had a steady week, trading between US$42.50 per barrel and US$42.90 for most of the week.

Gold fluctuates

Gold started the week at US$1940 per ounce, rising to a high on Wednesday of US$2015 before dropping to US$1945 on Friday.

Economic Data Highlights this week will include:

Tuesday:

• German IFO Business Confidence

• BOE Haldane speech

• US Jobless claims
• GDP Price Index

Friday             

• EU Consumer confidence and economic sentiment
• BOE Bailey speech