The euro is sitting at a 5 week low against the US dollar this morning as the single currency continues to be plagued by uncertainty surrounding ECB strategy. Larger than expected credit write downs at Bank of America yesterday reignited fears that the worst is not over in the financial crisis putting an end to the recent 6 week rally in global equities.

Pound Sterling - UK Markets

Sterling has declined against the US dollar, finding support just above the 1.45 level, as a wave of risk aversion swept markets overnight. This morning the pound is largely unchanged against the euro, trading in the vicinity of 1.12 and is down over 1% on the New Zealand dollar.

Inflation figures out this morning show consumer prices falling in the UK. The core consumer price index for March is running at 2.9%, taking the annual rate of inflation to 1.7%. The retail price index is running at 0% for March, taking the annual rate to -0.4% largely due to falling house prices and lower interest rates. The lower cost of energy is also fuelling the downward trend and this is helping to bring inflation inline with the government target of 2%. This morning Tesco has reported a GBP3 billion profit, a 10% rise since the last financial year. We can expect some volatility for the pound during the rest of the week with Bank of England minutes, the annual budget, ILO unemployment rate and continuing jobless claims out tomorrow.

US Dollar - US Markets

The US dollar strengthened overnight, trading in the vicinity of 0.77 versus the euro and 0.68 versus the pound as credit losses at Bank of America prompted fresh fears over the stability of the financial sector. This morning the higher yielding currencies have trimmed losses against the dollar with the pound, Aussie and Kiwi dollars all staging minor rallies.

Bank of America’s corporate earnings released yesterday show that despite a USD4.2 billion first quarter profit, the bank will be forced to set aside over USD13 billion to cover toxic loans. This ends up close to a break even performance and the news rattled markets, renewing fears that the worst of the recession may not be over. Bank of America shares lost 24% while Citigroup shares declined more than 16%. The news also affected global equities with the S&P closing down 4.3% and the Dow Jones losing 3.6%. The losses also put an end to the 6 week rally in global markets and economists predict markets are entering a phase of short term consolidation with credit losses expected to get worse before they get better. In the US today Treasury Secretary Geithner is to make a speech and the Washington Post Consumer Confidence survey is due.

Euro – European Markets

The Euro continues to fall against the dollar, reaching a five week low of 1.28 during Monday’s US session and remains bearish this morning. Against the pound the euro staged a slight recovery yesterday and the euro has also declined against the Australian and New Zealand dollars.

Statistics released in Germany this morning show the producer price index fell -0.7% in March, taking the annual rate to -0.5%. The public debate between ECB members over the best course of action for the Eurozone continues to pressure the single currency in the absence of any positive financial data. Uncertainty over the pending ‘unconventional measures’ from the ECB is making investors nervous although a reduction in the base rate by 0.25% seems likely. Results of the German ZEW economic sentiment survey are due out this morning.

Other Currencies - Highlights

Asian equities fell across the board yesterday, triggered by renewed fears over the state of the financial sector in the US. The yen ended three days of gains against the euro and dollar although recent signs of improvement in the Chinese economy have acted as a buffer to drastic selling. Also this morning the Indian Central Bank has reduced the repo rate, at which the bank makes short term loans into the economy, by quarter of a percentage point to 4.75%. This is the sixth time since October the rate has been reduced and the Indian Central Bank expects growth to slow to 6% this year. The Canadian Central Bank is to make an interest rate decision today.

The CBI has predicted the UK economy will contract by 3.9% in 2009, more than twice the amount predicted by Alistair Darling late last year. The euro has reached a one month low against the dollar amid concerns that the ECB is not doing enough to safeguard the ailing eurozone economy and US leading indicators released today are expected to show signs of recession easing in the US.

Pound Sterling - UK Markets

Sterling has lost ground against its major currency partners this morning, having declined over 1% against the US dollar and Japanese yen as the looming budget puts pressure on the pound.

The CBI have predicted the UK economy will contract 3.9% in 2009 with a total economic contraction of 5.1% by the end of the recession. This is more than twice the decline predicted by Alistair Darling in his pre-budget report and Wednesday’s budget is expected to downgrade economic forecasts while highlighting increased government borrowing. However recent economic news shows the pace of decline is slowing in both the US and UK and the CBI expects the economy to return to positive growth by the second half of 2010. While the pound remains weak internationally, this could aid recovery through more competitive pricing and there is a reported 1.8% increase in house prices in March. There is no major data released in the UK today.

US Dollar - US Markets

The dollar is stronger this morning, reaching a one month high against the euro and gaining over 1% on the pound after a better than expected performance from Citigroup on Friday boosted Wall Street and global equities. Citigroup reported a profit of USD1.6 billion, its first in nearly 2 years and this improved market sentiment and added to the view that the US economy may be taking its ‘first steps’ towards recovery.

Today Bank of America, Google and Yahoo are to release corporate earning figures and this could lead to a further revival of risk appetite. The leading indicators index is also out today and this is expected to show an easing of recession in the US as Federal cash injections and lower interest rates are work to boost spending and investment. Consumer confidence figures and jobless claims are due out later in the week.

Euro – European Markets

The euro has declined against the US dollar and yen this morning but improved against the pound ahead of the UK budget due on Wednesday. Dropping below 1.3 versus the US dollar, the euro has reached a one month low amid concerns the ECB is not doing enough to protect the eurozone economy. The euro has also hit a 3-week low against the yen.

As the US and UK economy are starting to show signs of the recession easing, the decline appears to be deepening across the eurozone and this, along with mounting concerns over the effectiveness of the ECB is placing the euro under pressure. Comments from ECB members Axel Weber and President Trichet last week also increased speculation of further interest rate cuts. There is no major data released in the eurozone today with Germany’s producer price index and ZEW economic sentiment survey out tomorrow.

Other Currencies - Highlights

Currency exchange rates for the Australian and New Zealand dollars continue to shadow investor appetite for risk. After reaching a 6-month high against the euro on Friday with news of Citigroup profits, the Aussie and Kiwi dollars have slumped this morning with rumours of splits in the ECB leading investors to favour the safe haven currencies. Figures out this morning show Australian producer prices fell 0.4% in the first quarter of 2009 and are running at a 4% increase on the year.

The yen continues to strengthen despite declining export figures and the deteriorating Japanese economy. The Bank of Japan is expected to slash economic forecasts this week as consumer demand collapses and the Japanese economy is expected to contract by 4.2% in 2010. Japan’s leading economic indicators and Canadian foreign investment figures are released today.

Better than expected jobless data in the US yesterday bolstered investor hopes of a tentative stability in the world’s largest economy. While economic data continues to be mixed, there is growing evidence the rate of decline is slowing in the US and to a lesser extent, the UK. This morning sterling has fallen from its 3 month high versus the US dollar but continues to gain against the euro.

Pound Sterling - UK Markets

The pound declined against the US dollar yesterday as better than expected jobless data in the US boosted hopes of a tentative recovery. This fuelled demand for the dollar at the expense of the pound and euro. Sterling has fallen away from 3 month highs against the dollar to trade in the region of 1.48 this morning but continues to gain on the euro, trading at the interbank rate of 1.13 early this morning.

David Miles, chief economist at Morgan Stanley in the UK has added to the positive chorus, noting that recession may ease as quantitative easing and other government initiatives begin to trickle down to the wider economy. Miles is set to replace David Blanchflower on the MPC in June. However, several large question marks remain over the UK economy and sterling exchange rates remain subject to international appetite for risk. The Council of Mortgage Lenders has cited negative equity as a factor in the low property market turnover and sentiment towards sterling is likely to remain muted in the lead up to next weeks budget. There is no data out in the UK today.

US Dollar - US Markets

The US dollar strengthened broadly overnight as better than expected jobless data boosted hopes that the pace of recession may be easing. The Philly Fed manufacturing survey also showed the rate of decline is slowing although both housing starts and new building permits continued to fall on their way to record levels in March.

This news provided fuel for a dollar rally against its international currency partners as it boosted hopes we are beginning to see the ‘green shoots’ of recovery in the US. This morning search engine Google has announced strong profits for the first quarter of 2009, rising to USD 1.42 billion which is significantly better than expected given the downturn in advertising spending as a result of recession. JP Morgan announced better than expected profits yesterday, sending the FTSE 100 to close 2% higher and Citigroup is to release company earnings later in the day. This, combined with a speech by Ben Bernanke could have a positive impact on Wall Street and international markets.

Euro – European Markets
The euro is broadly weaker this morning following Trichet’s comments that the ECB must do everything possible to restore corporate confidence, increasing speculation of further rate cuts and quantitative easing in the Eurozone. The euro continues to decline against the pound but has found support at the 1.3 level versus the US dollar.

This morning Sony Ericsson has announced 2,000 job cuts in an attempt to save EUR400 million after an extremely difficult first quarter. This follows Nokia’s announcement yesterday of a 90% profit fall in the first quarter of 2009 and both companies expect to face challenging markets throughout 2009. The EMU trade balance is released this morning with the producer price index for Germany due early next week.

Other Currencies - Highlights

News that China’s growth rate has fallen to 6.1% prompted a return to safe haven currencies and this sent the Australian and New Zealand dollars lower against their international currency partners overnight. The Aussie and Kiwi dollars both sunk to 2 month lows against the Japanese yen. Australian growth and budget forecasts due in May are now expected to be significantly worse than predicted and New Zealand inflation rates have fallen to 3% as consumer demand wanes in the midst of global recession. This is prompting speculation that the RBNZ may leave interest rates unchanged again this month. The Australian import and export price indices are out this morning.

Equity markets remain neutral this morning ahead of retail sales figures and jobless claims due in the US this afternoon. Stocks posted minor rallies yesterday as JP Morgan Chase announced a profit in the first two months of 2009 although risk trends continue to drive international currency exchange rates.

Pound Sterling - UK markets

The Pound remains in the doldrums this morning, having lost ground against the US Dollar, Yen and Euro as investors favour risk aversion in the midst of deepening recession. Lacklustre trade data has kept the underlying trend in Sterling neutral.

Market reaction to the first gilt auction held by the Bank of England yesterday was muted and unease surrounding quantitative easing continues to weigh on the Pound. Yesterday official statistics revealed the UK economy in deficit to the tune of -£3.5 billion for goods and services in January. The deficit in traded goods fell to -£7.7 billion which is compatible with weaker industrial production figures for January. Sterling remains extremely weak internationally and the March unemployment rate will be a source of volatility for markets. Budget supermarket chain Morrison’s has announced a 7% increase in profits on the back of higher sales during the credit crunch. Today there is no data of note from the UK and Sterling is likely to be driven by international risk trends.

US Dollar - US Markets

The Dollar is gaining ground this morning against its major currency partners as investors remain risk averse. The US Dollar is up over 1% on the Australian Dollar and Indian Rupee, while it has lost nearly 1.5% against the Yen as demand for safe havens continues.

US equities gained yesterday as JP Morgan Chase joined Citigroup in announcing a profit in the first two months of 2009. While it may be premature to say this indicates an end to the downturn, it does suggest greater stability in the banking sector and this was a source of confidence for equities in the US, Europe and Asia. US jobless claims and retail figures are due today and this is likely to be a source of volatility for currency exchange rates as retail sales are regarded as an important driver of the domestic and global economy. The US trade balance is out tomorrow.

Euro – European Markets

The Euro remains low against the US Dollar, Yen and Swiss Franc this morning amid speculation that industrial production figures for Germany are likely to be negative. The Euro continues to strengthen over the Pound and is trading at higher levels against the Australian and Kiwi Dollars.

The EMU producer price index has fallen -0.1% for January and is expected to show a 0.5% increase for the year. Recession continues to gather pace in the Eurozone and industrial production figures for Germany, the largest economy in the region, are expected to confirm this. ECB President Trichet has recently stated that ECB interest rates are likely to stay above 1% and this reluctance of the ECB to act is weighing on the Euro. Central Banks around the world have slashed interest rates in response to the credit crisis and the ECB remains curiously behind the curve. However, the ECB overnight deposit rate is 0.5% - the same as the MPC base rate - and this is helping to drive interest rates down for European banks. The ECB monthly report is due today and the Swiss interest rate decision is due tomorrow.

Other Currencies - Highlights

In Australasian markets, the Reserve Bank of New Zealand cut interest rates by 0.5% to 3% in an attempt to kick-start the economy yesterday. The reduction was in line with market expectations and the Kiwi rose to a two week high against the US Dollar following the announcement. In Australia the unemployment rate has risen to 5.2%, up from 4.8% the previous month. Unemployment is now at the highest level in 4 years and recession could be looming on the horizon for the Australian economy. New Zealand retail sales figures are due tomorrow and the unemployment rate is released in Canada.

GDP figures for Japan this morning show the Japanese economy shrunk -3.2% in the fourth quarter of 2008, taking annualized GDP down to -12.1%. This contraction is the steepest since 1974 and fuelled further gains in the Yen as investors sought to limit their risk by buying the perceived safe haven currencies.

Risk trends remain the primary determinant of currency exchange rates this morning as the US cash injection for AIG yesterday renewed fears of institutional failure. Deemed too big to fail by the US authorities, AIG has received a further $30 billion in Federal funding and is now 77.9% taxpayer owned. Markets plummeted around the world on the back of this news sending the Pound and Euro to the bottom end of their trading ranges versus the US Dollar and Yen.

Pound Sterling - UK markets

The Pound has recovered to 1.40 against the US Dollar this morning after hitting 1.39 in the wake of the HSBC announcement that they would be seeking to raise cash to offset profit losses. The Pound is also down to 1.11 against the Euro and has declined 1.7% against the Australian Dollar as the Federal bail out of AIG rattled investor confidence overnight.

The UK FTSE closed on a six year low yesterday after news of a £12.5 billion fundraising drive at HSBC triggered investor fears over further institutional failure. Northern Rock posted a £1.4 billion loss yesterday for 2008 although the bank claims to be ahead of target in paying back the government after being nationalised in February 2008. The construction sector PMI released this morning shows a figure of 27.8 indicating a decline in activity in the month of February. There is unease surrounding Sterling at present as the government moves into a new era of fiscal policy with the approach of quantitative easing. The Bank of England meets on Thursday and economists are predicting a final 0.5% reduction to the base rate.

US Dollar - US Markets

The Dollar spiked overnight against the Euro and Pound as the Federal bail out of AIG heightened investor nerves. However the higher yielding currencies have rebounded this morning with the Euro and Pound clawing back ground to trade at 0.79 and 0.70 respectively. The US Dollar has gained on the Japanese Yen.

Stock and equity markets went into a tailspin yesterday after American insurance giant AIG posted a $61.7 billion profit loss, the largest in US corporate history. The US government provided a further $30 billion of financial aid, taking the amount of taxpayer funds received by the corporation to $150 billion and taxpayer ownership to 77.9%. The Dow Jones and Standard and Poor’s plummeted 4.2% and 4.7% respectively and market declines were felt around the world from Tokyo to London. Treasury Secretary Timothy Geithner will attempt to restore market confidence in a speech later today.

Euro – European Markets

The Euro is climbing against the Dollar and Pound this morning as markets recover some of the ground lost overnight. The Euro has gained 0.6% on the Dollar to trade at 1.26 and nearly 1% on the Yen to trade at 123.76. Against the Pound the Euro remains in the vicinity of 0.89.

Manufacturing activity in the Eurozone fell to the lowest level in 12 years, figures released yesterday show. Despite better than expected figures in January, results for February weighed on the Euro exchange rate and this decline is likely to be reflected in first quarter GDP statistics. Central and Eastern European banks are to be on the receiving end of a €24.5 billion bail out from the World Bank, European Investment Bank and European Bank for Reconstruction and Development. Developing European economies have been hit particularly hard by the credit crunch and the package is a co-ordinated attempt at refinancing and encouraging lending in the region. Austria has seen the cost of its insurance rocket after Moody’s reported Austrian banks are the most exposed to losses in Eastern Europe. Speculation over the ECB meeting could impact on the Euro this week and the ECB meets on Thursday to announce their interest rate decision.

Other Currencies - Highlights

Japanese stocks traded close to 26 year lows on Tuesday after persistent market fears over the further failure of financial institutions. AIG and HSBC have been in the spotlight recently and questions over their financial health sent stock and equity markets to new lows.

Canadian GDP for the fourth quarter of 2008 declined 4.3%, the sharpest quarterly decline since 1991 and this sent the Canadian Dollar lower against the US Dollar overnight. The CAD has recovered losses this morning, currently trading at 1.28 to the US Dollar ahead of the Bank of Canada interest rate decision today.

The Reserve Bank of Australia has voted to leave the official cash rate unchanged at 3.25% signalling an end to the aggressive rate cuts that began in September 2008. This strengthened the Aussie Dollar nearly 2% on the Pound overnight as the Australian government is regarded as ahead of the game when it comes to fiscal policy.

Global stock and equity markets have plunged around the world following worse than expected US GDP figures released on Friday. The US economy contracted at an annualised 6.2% in the fourth quarter of 2008 and this sent investor confidence plummeting and fuelled a rise in risk aversion. Reports this morning of further trouble in the banking sector and a potential bail out of AIG have kept risk aversion high on the international agenda, capping currency exchange rates.

Pound Sterling - UK markets

The Pound is weaker against the US Dollar, trading at 1.42 as investors remain risk averse in the wake of more negative economic data. The Pound is also down against the Dollar, Yen and Euro and has posted gains on the South African Rand and New Zealand Dollar.

Further trouble in the banking sector has put Sterling under pressure this morning as banking giant HSBC has announced a £12.5 billion fundraising drive to underwrite losses as a result of the credit crunch. HSBC is Europe’s largest bank and has recently revealed a 62% drop in profits. This news sent bank shares 10% lower this morning. Lloyds is also making headlines after striking a deal with the Treasury to insure £250 billion worth of bad debts through the Asset Protection Scheme. Lloyds is currently attempting to keep government ownership below 50%. UK Manufacturing PMI this morning is distinctly bearish, coming in at 34.7 and the Engineering Employers Federation (EEF) has predicted 140,000 manufacturing jobs will be lost as a result of the credit crunch. The EEF has predicted the manufacturing sector will contract by 8.6% this year. The extent of government support for the banking sector is likely to support the Pound in the long term yet Sterling remains vulnerable at present. The construction sector PMI is out tomorrow and the Bank’s interest rate decision is due on Thursday.

US Dollar - US Markets

The Dollar is broadly stronger this morning, gaining on all it’s major currency partners with the exception of the Japanese Yen as low investor confidence favours safe haven currencies. The Dollar-Pound exchange rate is currently 0.70 while the Dollar-Euro rate is at 0.79.

Figures on Friday revealed the US economy shrunk an annualized 6.2% in the fourth quarter of 2008 while consumer spending declined 4.3%. These figures were worse than expected and sent global equities into retreat over the weekend. Consumer confidence accounts for 70% of GDP in the US and as such, is closely linked to business confidence and market sentiment. This news, combined with reports that AIG may need a further cash injection has sent Wall Street along with European and Asian equities plummeting and served to strengthen the US Dollar this morning. Last week the Federal Reserve agreed to convert up to $25 billion of Citigroup shares into common stock to support the bank during credit crisis. Personal income and spending figures are due in the US today and this is also likely to impact on market confidence.

Euro – European Markets

Results are mixed for the Euro this morning, having declined against the US Dollar, Yen and Swiss Franc while posting gains against Sterling and the New Zealand Dollar. The Euro-Pound exchange rate is currently 0.88 while the Euro-Dollar exchange rate is 1.26.

The Purchasing Manager Index released in Germany this morning is down to 32.1 for the month of February as manufacturing orders have decreased sharply with contracting export markets. The Purchasing Manager Index for the Eurozone fell to 33.5 for February, a figure largely in line with market expectations. European equities are weaker this morning due to a surge in risk aversion following the reported nationalisation of AIG. The UK FTSE fell 3.2% while Germany’s Dax index fell 2.76%. Eurozone unemployment has risen more than expected in January, while inflation reached its lowest point in 10 years. The ECB is expected to provide a 0.5% reduction in the base rate when it meets in Thursday.

Other Currencies - Highlights

The Australian and New Zealand Dollars declined against the Pound late last week after risk aversion heightened with weak GDP figures from the US. The RBA interest rate decision is due tomorrow and this will be a source of volatility for the Aussie Dollar. South Africa has managed to lower its unemployment rate despite economic contraction, as the construction industry added jobs ahead of the next FIFA world cup. The unemployment rate declined to 21.9% with the jobless number falling from 4.12 million to 3.87 million.

Sterling is under pressure this morning over losses in the banking sector. Lloyds is yet to strike a deal with the Treasury over inclusion in the Asset Protection Plan and HBOS has announced over £10 billion worth of write downs for 2008. GDP figures out in the US later today will be a source of interest for markets as growth prospects in the world’s largest economy remain a key driver of economic sentiment and currency exchange rates.

Pound Sterling - UK markets

The Pound has declined against the Dollar overnight and is also lower against the single currency as losses in the banking sector dominate headlines in the UK. Markets have gained some solace over the level of Government commitment to the bail out but the prospect of rising government debt is anchoring Sterling to the bottom end of trading ranges. The Pound has gained on the Australian and New Zealand Dollars as appetite for risk diminishes ahead of US GDP figures out today.

Yesterday Sterling suffered in response to the news that the Government would increase its stake in RBS to 84%. Current predictions show the level of taxpayer ownership could rise as high as 95%. Shares in fellow banking giant Lloyds have plummeted 7.4% this morning following news that the bank is yet to strike a deal with the Treasury to insure over £200 billion worth of toxic debt. Despite posting a profit of £807 million in 2008, Lloyds shares have been dragged down after the acquisition of HBOS late last year. HBOS lost £10.8 billion before tax in 2008. UK consumer confidence rose slightly in February, up 2 points from January as the effects of monetary easing are starting to work their way into the economy. There is no further data in the UK today.

US Dollar - US Markets

The Dollar has spiked against the Euro and Pound this morning ahead of annualised US GDP and personal consumption figures to be released later in the day. Investors remain uneasy about what these announcements will bring and this is fuelling risk aversion which is driving Dollar strength. The US Dollar is up over 1% on the Australian and Kiwi Dollars and has gained 0.95% on the Pound.

Growth prospects in the US remain a key indicator of market sentiment and currency exchange rates. An annualised contraction of -5.3% is expected for the fourth quarter following a 0.5% annualised contraction in the third. This represents the drastic decline in the US economy following the market shocks in late 2008. Personal consumption expenditure will also be viewed with interest as consumer spending accounts for 70% of the US economy. The Obama administration has instructed Citigroup to find a private source of capital after committing $45 billion to the bank last year. Shares in Citigroup fell below $2 for the first time in 18 years this week amid speculation that the Bank would be subject to nationalisation. GDP and personal consumption figures are out later in the day.

Euro - European Markets

The Euro remains bearish this morning due to a combination of risk aversion, lower commodity prices and the prevailing market view of economic deterioration in the Eurozone. The Euro is up against the Pound, Australian and New Zealand Dollars although has suffered declines against its other currency partners including the Yen, Canadian and US Dollar.

European equities were in retreat yesterday amid concerns over commodity prices and the economic situation in Eastern Europe. The Hungarian Prime Minister has requested a ?180 billion aid package for Eastern Europe which is set to include recapitalisation for banks and restructuring of foreign debt. The rapid depreciation of national currencies is also a pressing concern. The Polish Zloty has dropped 29% against the Euro in the last 6 months and other currencies have suffered similar declines. The EMU consumer price index and employment rate are out today along with the consumer price index for Germany.

Other Currencies - Highlights

Australian markets received a boost overnight as strong capital spending figures triggered confidence in the economy to weather global recession. Capital spending in the final quarter of 2008 showed a 6% rise despite expectations of a 3% decline. Capital spending makes up 10% of GDP and this sent the Australian Dollar higher against the US Dollar. The return of risk aversion this morning though has seen the US Dollar recover over 1% on the Aussie. The RBA interest rate decision is due next week.

Canadian stocks have rallied overnight as three major banks posted higher than expected profits. The National Bank of Canada, Royal Bank of Canada and Canadian Imperial Bank of Commerce each gained more than 6% after making profits without the help of government aid, boosting investor confidence in the sector.

Figures released this morning show UK GDP contracted 1.5% in the final quarter of 2008. This takes annual growth to -1.9%; a figure largely in line with market expectations. Wall Street gained over 3% yesterday, the largest gain in a month, after comments from Head of the Federal Reserve Ben Bernanke quelled investor fears over the state of the US banking sector.

Pound Sterling - UK markets

The Pound is up 0.6% on the Dollar this morning, trading at 1.45 on the back of increased risk appetite after Wall Street gains yesterday. The Pound is also up against the Euro, Yen and Australian Dollar, trading at 1.13, 141 and 2.22 respectively.

UK GDP figures out this morning show the economy contracted by -1.5% in the fourth quarter of 2008. However despite this, the Pound has strengthened as a result of positive market sentiment in the US. Minutes from a meeting of EU officials yesterday showed concern over the ‘financial stability’ of the British economy following the rapid demise of the Pound late last year. The Pound has fallen 23% against the Euro as a major trading partner, this weakness is a concern for the Eurozone. Exceptionally high volatility over recent months is also undermining financial stability. UK statistics yesterday showed mortgage approvals down 40% on this time last year and unemployment continues to rise. However the CBI Distributive Trades survey was less negative than expected and the retail sales index rose from -47 last month to -25 this month due to more positive sales figures. The Bank of England MPC meets next Thursday and market expectations are for a further 0.5% rate reduction. Reductions beyond 1% are regarded as less significant and quantitative easing is likely to be the path of the government over the coming months. There is no further data in the UK today.

US Dollar - US Markets

Mixed results for the Dollar overnight as increased risk appetite led to a redistribution of investor funds. The Dollar weakened against the Euro and Pound to trade at 0.77 and 0.68 but retained gains against some of its Asian and European currency partners.

Head of the Federal Reserve Ben Bernanke quelled fears over the state of the US banking system yesterday in a speech noting that nationalisation of major banks would not be necessary. Bernanke stressed the role of government as supervisor rather than shareholder and Wall Street posted its largest daily gains in a month. President Obama also addressed the nation, detailing aspects of an ambitious government plan which includes both stimulating and greening US industry, cutting taxes and halving the US budget deficit within the next five years. Despite the inevitable criticism for the over ambitious nature of the plan, stock and equity markets gained confidence, improving global risk appetite. Also yesterday the Washington Post survey showed US consumer confidence plunged 10 points to a record low in February, on the same day as the German IFO revealed the same results in the Eurozone. US Home sales figures are out later today.

Euro – European Markets

The Euro has gained against the Dollar to trade at 1.28 and is up against the Yen as well as its European currency partners.

Stocks in Europe and Asia advanced following news from the US that the government would not have to nationalise major banks. Shares in Deutsche Bank and PNB Paribas, Germany and France’s largest banks both surged more than 7%. German GDP figures released this morning show the economy contracted -2.1% in the fourth quarter of 2008, reflecting the rapid deterioration of the European economy. This takes annual growth to 1.6% a figure that was largely in line with market expectations. The ECB has strongly hinted at a further interest rate reduction in March. The German consumer price index and unemployment figures are out tomorrow.

Other Currencies - Highlights

The Australian and New Zealand Dollars rallied overnight, following comments from Ben Bernanke which served to strengthen risk appetite internationally. The Australasian currencies continue to shadow US equities which remain the primary determinant of market sentiment.

Japanese exports have plunged 45.7% in January, taking them to the lowest figure in 10 years as a result of reduced demand from Japan’s major trading partners. The decline was fuelled by a 53% drop in exports to the US, 47% to the Eurozone and similar steep declines to China and other Asian economies. The Canadian Dollar is up to 1.24 against the US while the Swiss Franc is down on the Dollar, a further symptom of increased appetite for risk.

The Euro has suffered its biggest weekly decline against the US Dollar in a month – and the seventh weekly loss out of eight – amid speculation that European Central Bank President Jean-Claude Trichet will today signal that he may cut interest rates to spur growth. The 16-nation currency is currently hovering just over 1.26 against the US Dollar.

Pound Sterling - UK markets

According to the Council of Mortgage Lenders, the number of homes that were repossessed in the UK declined slightly in the fourth quarter. A total of 10,400 homes were taken into possession between October and the end of the year, down from 11,100 between July and September.

However, a report released by the Office for National Statistics showed a surprising lift in UK retail sales in January. The rise is being attributed to the numerous price cuts that UK retailers made during the previous month. Despite the closure of numerous stores, such as Zavvi and Woolworths, retail sales have climbed 0.7% after increasing 1.7% in December. Economists had predicted a 0.1% drop.

US Dollar - US Markets

The Dollar has declined over 1% against the Euro this morning as fears abate over European exposure to bad debts and the US stimulus packages revives appetite for risk. The Dollar is also down over 1% on the Australian and Kiwi Dollars and is down to 0.69 against the Pound.

Yesterday’s figures in the US revealed housing starts and new building permits dropped to record lows in January along with industrial production figures which contracted 1.8% for the month. This signals a weak start to 2009 after the US economy contracted 3.8% in the final quarter of 2008. President Obama released details of a $275 billion housing package which is an attempt to address the root of the financial crisis and prevent the rising number of foreclosures on American homes. An estimated 400,000 home owners lost their homes in the US last year. This comes in the same week as the $787 billion rescue package, yet market response remains uncertain as details and growth prospects are unclear. The Federal Reserve have also announced they expect unemployment to rise to over 8.5% and projected long-term interest rates at 2%. The FOMC minutes are released today along with the Philadelphia Fed and jobless claims figures.

Euro – European Markets

French consumer prices fell in January for the seventh month in a row, but by less than expected, as prices for energy slumped and those of manufactured products remained unchanged. The French CPI report dropped 0.4% on the month, cutting the yearly increase to 0.7%, French national statistics bureau Insee said.

However, other key gauges of euro zone services and manufacturing activity unexpectedly crashed to new lows in February, suggesting that economic contraction in the first quarter of this year may be even worse than the final months of 2008.

Data released by Markit today has shown that the Purchasing Managers Index for the dominant service sector slumped to an 11-year survey low of 38.9 in February, confounding expectations that we would see a rise from 42.2 to 42.4. The data also showed price pressures sinking to survey record lows and is sure to strengthen expectations that the ECB will be forced to cut interest rates when it meets again in March.

Factories in the euro zone fared little better, with the manufacturing PMI also coming in at a record low of 33.6, considerably below the 50.0 mark that divides growth from contraction and, indeed, the 34.4 level seen January. The fall in both sectors took the combined composite index down to a record low of 36.2 from January’s 38.3 and well below the 38.5 forecast. The suggestion is that the 1.5% contraction in the economy in the final quarter of 2008 may be even worse in January-March.

Other Currencies - Highlights

The South Korean Won nosedived to a three-month low against the US Dollar this morning, breaking the 1,500 mark for the first time since November 2008 and closing yesterday at 1,506 Won against the US Dollar. Analysts predict that the Won will stay on this downward slump for the time being at least.

The Pound fell to a two week low against the Dollar yesterday as minutes from the MPC meeting revealed quantitative easing is increasingly likely for the UK. The Euro is under pressure due to concerns over the economic situation in Eastern Europe and the US has passed a $275 billion package to address the crisis in the housing market.

Pound Sterling - UK markets

The Pound is gaining against the US Dollar this morning, currently trading at 1.43 after reaching a two week low yesterday. The release of MPC minutes indicating that quantitative easing was likely damaged the value of the Pound, although it was the Euro that came under pressure over concerns surrounding Eastern European economies. The Pound-Euro exchange rate is currently 1.13 and Sterling has gained against its major foreign currency partners.

Having revealed an 8-1 vote in favour of a 0.5% reduction in the base rate, the MPC minutes also indicated that quantitative easing is imminent as the Bank will buy gilts and other securities to increase the supply of money into the economy. With interest rates effectively at zero, the Bank is seeking more unconventional methods of unlocking credit markets and alleviating toxic debts. Sentiment regarding Sterling has turned marginally positive as markets focus on bad news coming from the Eurozone and Asian economies. This has allowed Sterling to stage a minor rally against the Euro and Japanese Yen. Money supply data is out in the UK this morning and retail sales figures are due tomorrow.

US Dollar - US Markets

The Dollar has declined over 1% against the Euro this morning as fears abate over European exposure to bad debts and the US stimulus packages revives appetite for risk. The Dollar is also down over 1% on the Australian and Kiwi Dollars and is down to 0.69 against the Pound.

Yesterday’s figures in the US revealed housing starts and new building permits dropped to record lows in January along with industrial production figures which contracted 1.8% for the month. This signals a weak start to 2009 after the US economy contracted 3.8% in the final quarter of 2008. President Obama released details of a $275 billion housing package which is an attempt to address the root of the financial crisis and prevent the rising number of foreclosures on American homes. An estimated 400,000 home owners lost their homes in the US last year. This comes in the same week as the $787 billion rescue package, yet market response remains uncertain as details and growth prospects are unclear. The Federal Reserve have also announced they expect unemployment to rise to over 8.5% and projected long-term interest rates at 2%. The FOMC minutes are released today along with the Philadelphia Fed and jobless claims figures.

Euro – European Markets

The Euro has strengthened this morning, gaining over 1% on the US Dollar to 1.26 after falling to its lowest rate since mid-November yesterday. The Euro-Sterling exchange rate is currently at 0.88 and the Euro has advanced on the Japanese Yen and New Zealand Dollar.

The Euro came under pressure yesterday as news of the deteriorating economic situation in Eastern Europe raised fears over the exposure of Western European banks. The Polish Zloty, Czech Koruna and Hungarian Forint have all reached multi-year lows against the Euro and major European banks warned of pending job cuts despite Societe Generale posting a fourth quarter profit. European equities gained for the first time in 8 days on the back of better than expected profits released from Nestle and BNP Paribas yesterday. The ZEW survey for Switzerland is out this morning and EMU purchasing manager indices for manufacturing and services are due tomorrow.

Other Currencies - Highlights

The Australian Dollar is under pressure this week amid news that Moody’s is to review the credit rating of the Australian Government. The Standard and Poor’s has previously claimed Australian banks are ‘well placed’ to withstand the downturn yet recent economic data from Australia has been worse than expected. The Bank of Japan left interest rates unchanged yesterday at 0.1% and the Yen fell to a 6 week low against the Dollar with the passing of the Housing Bill in the US Senate. Consumer Price index figures for Canada are due tomorrow.