The UK economy contracted -1.9% in the first quarter of 2009, more than economists expected with record declines in the manufacturing and service sectors. This news has sent the pound plunging against the dollar and euro as investors also remain wary of record levels of government borrowing.

Pound Sterling - UK Markets

Sterling is sliding this morning against its major currency partners with the release of first quarter GDP figures showing the UK economy contracted significantly in early 2009. This morning the pound has slid over 1% on the euro, yen and New Zealand dollar, and 0.4% against the US dollar.

ONS statistics show the UK economy contracted -1.9% in the first quarter of 2009. This follows a -1.6% contraction in the previous quarter and was substantially higher than the -1.5% predicted by most economists. This takes the annual growth rate to -4.1%, a contraction significantly larger than the 3% predicted by Alistair Darling earlier in the week. Retail sales figures, a key indicator of consumer spending, rose 0.3% in March. Sterling is likely to continue its bearish run today as these figures, along with the 12.4% budget deficit, play on the minds of investors. Credit agency Moody’s has also expressed concern over the levels of government borrowing, which is set to reach GBP175 billion this year, prompting concerns the UK may lose its AAA credit rating. There is no further data in the UK today.

US Dollar - US Markets

The dollar is weaker across the board this morning, down 0.9% against the euro and yen, gaining only on the pound in terms of the major currencies.

The growing perception of ‘green shoots’ emerging in the US economy this week has supported a series of rallies in markets, boosting some of the higher yielding currencies at the expense of the dollar. Solid corporate earnings from Bank of America and Citigroup and increased funding from G20 nations have contributed to the view that the worst of recession may be easing. These rallies however, remain capped by bouts of negative data, with news that home sales fell 3% in March renewing concerns over the property market. The Federal Reserve’s methodology for stress testing banks is released today with results of the tests due on May 4. Market opinion currently is that the purging of toxic assets is far from over and the extent of credit write downs could damage positive sentiment in weeks to come. Durable goods orders and new home sales are out today.

Euro – European Markets

The euro has gained across the board this morning, strengthening to test 1.32 against the US dollar and gaining over 1.3% on the pound. The single currency has dipped slightly against the yen, Swedish kronor and Swiss franc.

The euro has benefitted from a glut of negative data released in the UK this week and rallies in equities supporting slightly higher risk appetite. Economic data yesterday showing the pace of recession in the Eurozone easing also boosted confidence and the euro has moved to consolidate on this support. This morning, figures show the German IFO business climate and expectations rose to 83.7 and 83.9 respectively, which bode well for the rest of the region. There is no further data from the Eurozone today.

Other Currencies - Highlights

The Australian and Kiwi dollars have capped off a week of declines against the yen on concerns that recession will reduce demand for the export products of the two nations. Next week markets are likely to focus on the Reserve Bank of New Zealand’s interest rate decision where a 0.5% reduction is expected, and the National Bank of Australia’s business confidence survey.

The euro has risen against the US dollar this morning with economic news from the eurozone showing the pace of recession easing in the last month. Yesterday market focus was on the pound with the UK budget and 6.7% unemployment rate causing a dip in sterling exchange rates. However this morning sterling has recovered, finding support above 1.45 on the dollar and 1.11 on the euro.

Pound Sterling - UK Markets

The pound dipped to 0.90 versus the euro yesterday after the announcement of “eye watering” government debt in the UK rattled markets. Sterling lost ground the euro and dollar throughout the day but appears to have been given the benefit of the doubt this morning, maintaining support above 1.45 and 1.11 on the dollar and euro respectively.

The UK budget announced yesterday has been subject to in-depth economic analysis and will continue to do so over the coming days. Among the headline grabbers was Darling’s top tax rate of 50% and predicted growth contraction of 3-3.5% for 2009. Higher tax levels raised the issue of competitiveness internationally and prompted speculation that top investors would keep their money elsewhere. The government also confirmed the view that a weak pound in the short term will give export markets a much needed boost. The budget deficit, predicted to reach 12% of GDP, put gilt prices under pressure and sent Sterling exchange rates lower. Unemployment, the housing market, auto sales and the ‘greening’ of new industry also took precedence in the new budget. Bank of England minutes released yesterday showed the MPC unanimously voted to maintain current interest rates and quantitative easing levels. To cap off a big week in the UK, GDP figures and retail sales are due tomorrow.

US Dollar - US Markets

The dollar has weakened this morning, down over 0.5% against the pound, Australian and Kiwi dollars as positive news from the Eurozone has revitalised investor confidence. The dollar is currently in the vicinity of 0.68 against the pound, 0.76 against the euro and 98 against the yen.

Renewed concern over the banking sector caused a drop in equities late in the day yesterday as markets continue to oscillate between positive and negative territory depending on the latest set of data released. News that Morgan Stanley operated less profitably than expected, combined with the IMF report that contradicted UK growth predictions caused a plunge in risk appetite but markets have rallied this morning on the back of positive news from the eurozone. Initial and existing jobless claims, as well as new home sales for March are due in the US today.

Euro – European Markets

The euro has rallied this morning, boosted by a flight from sterling following the announcement of the UK budget and on the back of economic data showing recession easing in the eurozone. The euro is currently trading at 1.30 against the dollar and is up to 0.89 against the pound.

The German purchasing manager index out this morning has shown decline at the slowest rate in 5 months in both the manufacturing and service sectors. Industrial new orders for the eurozone also dropped less than expected and the EMU current account came in a EUR-8.1 billion. In addition to the news that Credit Suisse operated profitably for the first quarter of 2009 and French economic sentiment rose for the second consecutive month, this has supported the euro and moderated market opinion that the eurozone is becoming more entrenched in recession. The Swiss ZEW survey is due later in the day with Germany’s IFO business climate and expectations survey due tomorrow.

Other Currencies - Highlights

The Australian dollar continue to tread familiar ranges against the dollar and euro but spiked against the pound overnight as sterling was battered by low growth predictions and high budget deficits from the UK budget. Core inflation in Australia remained relatively high and economists predict the central bank is nearing the end of its interest rate reductions. Poor results for Morgan Stanley sent the New Zealand dollar lower as risk appetite diminished and comments from New Zealand finance minister Bill English, that New Zealand may be in its sixth quarter of recession also hurt the Kiwi currency. The Australian and New Zealand dollars are trading in the vicinity of 2.04 and 2.59 respectively.

Foreign exchange markets will focus on sterling today with the annual budget released in the UK. Equity markets rallied overnight on the back of comments from US Treasury Secretary Geithner. This fuelled a bounce in currency exchange rates that failed to include the euro and illustrated the pressure weighing on the euro at present.

Pound Sterling - UK Markets

The pound has weakened this morning against most of its international currency partners in the run up to the budget released today. The pound is trading in the vicinity of 1.45 against the US dollar and is down 0.5% against the euro with further exchange rate volatility likely throughout the day.

This morning’s budget is expected to be the most negative in a generation predicting a 3-3.5% growth contraction for 2009 and a deficit climbing to 12% of GDP. The government is also expected to announce plans for spending cuts and rising tax from 2011 along with moves to revitalise the property market and create thousands of new jobs in the UK. Minutes from the last Bank of England meeting also released this morning are likely to have little affect on markets as it remains too early to asses the effects of quantitative easing. The ILO unemployment rate has risen to 6.7% in the three months to February and public sector borrowing has increased to GBP19.1 billion, significantly ahead of market expectations. Also this morning, HM Revenue and Customs has announced a 40% jump in home sales for March. The budget is released at 12:30.

US Dollar - US Markets

The dollar has gained against the pound and euro this morning as uncertainty over the UK budget and fallout from the IMF report are weighing on the major currencies. The dollar is trading in the region of 0.68 versus the Pound and 0.77 versus the euro and has gained on the Canadian, Australian and New Zealand currencies.

A speech from Treasury Secretary Geithner’s yesterday led markets to a brief rally as he reassured investors of bank balance sheets. Equity markets and currency exchange rates are largely determined by the prevailing mood regarding the banking sector at present as this determines international appetite for risk. The USD-GBP exchange rate will likely be affected by the UK budget released today and we could see a weakening of the pound against the dollar. US mortgage applications and the housing price index for February are released later in the day.

Euro – European Markets

The euro continues its bearish run of the currency markets this morning, trapped below 1.3 against the US dollar and 0.89 against the pound. The euro has also declined against its Asian currency partners as details of an IMF report predict a long and entrenched recession for emerging European nations.

Positive news yesterday came in the form of the German ZEW economic survey which showed a surprise rise in confidence from -3.5 to 13. However, the fact that the euro failed to fully capitalise on this speaks volumes about market perception surrounding the Eurozone at present. Continued uncertainty from the ECB and details of the IMF financial stability report are weighing on the euro. The IMF forecast yesterday that European banks could face more substantial write downs and require greater capitalization than US banks. The IMF also expects a net investment loss to Eastern Europe with little hope of recovery in 2010 and 2011. There is little of note in the Eurozone today with the EMU current account, purchasing manager index and industrial new orders released tomorrow.

Other Currencies - Highlights

The yen advanced overnight as Japanese trade balance figures show the slump is slowing down. March export figures snapped a four month spell of record losses and this, in combination with worries over what further stress tests could expose in the US, caused the yen to advance on a basket of international currencies.

The Bank of Canada cut interest rates to a record low of 0.25% yesterday and plans to leave it there until inflation returns to its 2% target. The Canadian economy is expected to shrink 3% this year and the central bank is expected to announce a framework for quantitative easing on Thursday. This is weighing on the Canadian dollar at present. Leading indicators are published today.

Scottish MPs will question senior executives from Royal Bank of Scotland and Lloyds Banking Group – two of the banks given multi-billion pound bailouts by the government.

The Scottish Affairs Committee will hear from Gordon Pell from RBS and Archie Kane from Lloyds, and Alasdair Darling will be questioned further about the massive pension paid to former RBS chief executive Sir Fred Goodwin. Scottish Secretary Jim Murphy has accused Sir Fred of ”banking vandalism” and called his £16m pension fund “extraordinarily distasteful”.

Pound Sterling - UK Markets

A report released by the Office for National Statistics says that the UK public sector borrowed more than expected as central government tax revenue fell sharply on the year and spending continued to rise.

The UK public sector borrowed £9bn in February, a steep increase from £1.1bn a year earlier. Expectations for net borrowing were around £7.7bn and the reported level is the highest February borrowing figure since records began in 1993.

A report from the Council of Mortgage Lenders says that the slump in mortgage lending continued in February with gross lending down by 60% on February 2008. Lending, at £9.9bn, was 15% lower than in January, and was the lowest figure for any month since February 2001. The CML said its members’ ability to lend was drying up because too many savers were choosing to put their money in National Savings policies. Mortgage rationing has led to house sales falling by more than half.

US Dollar - US Markets

The Federal Reserve has said it will buy almost $1.2trn worth of debt to help boost lending and promote economic recovery. The Fed said it would start buying long-term government debt and expand purchases of mortgage-related debt.

The size of the move has stunned investors, and caused the Dow Jones stock index to jump almost 200 points. It is hoped that the measures will boost mortgage lending and the struggling housing market by lowering interest rates on mortgages and other forms of consumer debt.

The news caused a mammoth drop for the US Dollar. The greenback experienced its third biggest one-day decline yesterday since daily pricing began back in 1970, bringing a swift end to the rally that had pushed the Dollar to the highest levels since 2006. The greenback ended the day down against both the Euro and the Pound, and reached a three-week low against the Canadian Dollar.

Euro – European Markets

According to the Dutch National Bureau for Statistics, Dutch consumers are more pessimistic in March compared to a month earlier. The Dutch consumer confidence index stood at -34 in March, falling from February’s reading of -30. The bureau added that consumers have never been so pessimistic about the economy.

The bureau also released a report showing that the Dutch unemployment rate was 4.1% in the three months to February 2009, up from 3.9% in the previous three-month period, marking the third such period in a row in which unemployment has increased.

Other Currencies - Highlights

Excluding the Yen, all of the ten most-active Asian currencies have strengthened against the US Dollar. The Yuan rose to its strongest level this year, as the People’s Bank of China set the reference rate at the highest level in more than three months.

Meanwhile, analysts are predicting that the Indian Rupee will fall beyond record lows in the coming months, as the Reserve Bank of India focuses on supporting the government’s spending measures and attempts to stifle a market sell-off that has driven the yield curve to its steepest levels in 11 years.

Barclays have confirmed this morning that they are in talks with the Treasury over its potential participation in the government’s Asset Protection Scheme. Lloyds Banking Group and RBS are already signed up to the scheme. Barclays said that any decision on whether it would participate in the scheme would be based on “the economic merits to shareholders.”

Pound Sterling - UK markets

Barclays also confirmed that it is seeking to raise around £4bn by selling part of its £706bn iShares fund management arm in a further attempt to raise capital without turning to the government for any direct financial support.

There is now an average of 10 jobseekers for every vacancy advertised in the UK, the TUC has warned. The situation is worst in the South East of England where the trade union body said its research found 60 people chasing each job.

Official unemployment data compiled by the Office for National Statistics will be published on Wednesday and are expected to show UK unemployment at two million. Meanwhile, the British Chambers of Commerce estimated last week that UK unemployment would reach 3.2 million - or just over 10% of the workforce - by the second half of next year.

US Dollar - US Markets

Federal Reserve Chairman Ben Bernanke suggested in a televised interview on CBS’ 60 Minutes programme that the US recession would “probably” end in 2009, but that his country had averted the risk of plunging into a depression. Bernanke’s remarks came ahead of a two-day meeting by the Fed that begins tomorrow. It’s anticipated that they will launch some new programmes or expand existing ones to get Americans spending again. Any decisions are likely to be made public on Wednesday.

Under pressure insurance group AIG has revealed that it has spent billions of Dollars in taxpayer funds since its September bailout, with €105bn flowing to US states and banks including Goldman Sachs, Societe Generale and Deutsche Bank. Donald Powell, former chairman of the Federal Deposit Insurance Corp, sad the news “puts a sour taste in the American taxpayer’s mouth.”

US data revealed that retail sales fell by just 0.1% compared with the same month last year, better than the 0.5% drop analysts were expecting. American consumers have become more cautious amid difficult economic conditions, cutting back on more expensive items such as new cars, but continuing to flock to supermarkets and discount stores in search of bargains.

Euro – European Markets

Risk appetite continues to dominate European markets, which are posting increases above 2% today, with the EUR-GBP rate returning to its highest level since late February.

The Euro rose against the US Dollar as financial ministers from the G20 concluded their summit in London over the weekend, vowing to do “whatever is necessary” to fix the global economy. This statement is likely to include measures to supervise freewheeling hedge funds and restore bank lending by dealing with the shaky securities burdening their finances.

During the G20 meeting, Russia proposed the creation of a new reserve currency to be issued by international financial institutions. Leaders of the G20 leading economies will meet next month in London, with Russia calling for countries whose currencies currently have reserve status to adopt international rules on fiscal and macroeconomic discipline.

Later today, the European Monetary Union will release the Consumer Price Index and Employment Change figures for February.

Other Currencies - Highlights

The Swiss Franc has suffered its biggest ever single day drop against the Euro. The drop was triggered by news that the Swiss National Bank (SNB) will buy overseas currencies to try and stop its own currency rising further against the Euro.

Japanese stocks have risen almost 2% as the Japanese Central Bank considers buying loans and bonds to bolster its capital. The news has boosted Asian markets, with the Indian Rupee rising to its highest level for two weeks.

Yesterday brought an improvement in risk appetite with the news that Citigroup operated profitably in the two months of 2009. Accompanied by a speech from Ben Bernanke, this news restored market confidence and equity markets rallied which was reflected in currency exchange rates. This rally however has excluded Sterling, which remains weak on the back of unease surrounding Bank of England policy and a sharp decline in industrial production figures.

Pound Sterling - UK markets

The Pound fell to a 3 month low of 1.36 against the US Dollar yesterday and a five week low against the Euro, pressured by a combination of risk aversion, market unease and negative economic data from the UK. This morning the Pound has been trading in the vicinity of 1.37 versus the Dollar and 1.08 versus the Euro. The Pound has trimmed losses against the Australian and Kiwi Dollars although remains weak against its international currency partners.

Uncertainty surrounding the Bank’s quantitative easing programme and sharp declines in manufacturing and industrial production weighed on Sterling overnight. The Bank of England is to embark on a £75 billion quantitative easing programme today, which is designed to stimulate the UK economy over the next three months. Figures yesterday showed a 2.9% decline in the manufacturing sector prompting speculation that UK output could slump by 4% in 2009. Manufacturing output has now been in decline for 11 consecutive months and analysts are predicting the -1.5% contraction in the final quarter of 2008 could be repeated in the first quarter of 2009. Goods trade balance figures released this morning show a current deficit of -£7.7 billion illustrating reduced demand for UK exports and this could also weigh on Sterling throughout the day. The rest of the week is light for UK data.

US Dollar - US Markets

Results for the US Dollar exchange rates are mixed this morning as improved appetite for risk has permitted minor rallies in the higher yielding currencies. The Canadian, Australian and New Zealand Dollar have all gained on the US, along with the Euro, Pound and Swiss Franc.

US markets rallied yesterday after Ben Bernanke boosted confidence by stating the US could be out of the economic slump by the end of the year. Citigroup, which is now 40% government owned, operated profitably for the first two months of 2009 and this news sent the Dow Jones up 300 points after touching on 12 year lows last week. The FTSE 100 also gained 5%. Bernanke emphasised in his speech that stability in the banking sector is still a prerequisite to economic recovery, implying that this has not been achieved as yet. Moody’s has named a list of ‘bottom rung’ American firms that are likely to go bust this year due to limited credit markets and global downturn. The list includes the big 3 car manufacturers, GM, Ford and Chrysler as well as a number of high profile media companies and casinos. US mortgage application figures are due out today.

Euro – European Markets

The Euro is largely unchanged this morning, trading at 1.26 against the US Dollar and up slightly against the Pound to 0.92. The Euro has also gained on the Swiss Franc, Australian and Canadian Dollars.

Switzerland’s biggest bank UBS has posted a 20.9 billion Swiss Franc loss in 2008, the largest in Switzerland’s history. The German producer price index released this morning shows a -1.2% price decline in January, a day after figures showed a sharp narrowing of the German trade deficit and a decline in French industrial output. Recession is progressing with gathering pace in the Euro zone. German factory orders are out later this morning and the ECB monthly report is released tomorrow.

Other Currencies - Highlights

Dominique Strauss Kahn, Managing Director of the IMF has made a speech in Tanzania predicting that world growth would be 0% this year. Strauss Kahn has dubbed the economic downturn the ‘Great Recession’ and the IMF expect growth rates in Africa to significantly decline due to a lack of foreign investment in the region.

Australian business conditions have deteriorated to the lowest levels since the early 1990’s. The Australian and Kiwi Dollars gained ground overnight following Ben Bernanke’s speech in the US which restored market confidence. Gains for the Kiwi will be limited by the pending RBNZ interest rate decision. New Zealand retail sales and Japanese GDP are due out tomorrow.

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.

The Pound is sitting lower this morning against the Euro and US Dollar after RBS has posted the largest loss in corporate history. The bank which is now 68% taxpayer owned lost £24 billion in 2008. In combination with GDP figures which showed the UK economy contracted -1.5% in the fourth quarter, this news damaged the exchange rate value of Sterling, sending it back to the bottom end of ranges against its international currency partners.

Pound Sterling - UK markets

The Pound has lost ground against the US Dollar and Euro overnight, declining to 1.42 and 1.11 respectively after GDP figures revealed a sharp contraction in the fourth quarter of 2008. The Pound is also down against the Swiss Franc and Australian Dollar, but has gained on the Yen and other Asian currency partners.

The Pound declined yesterday as GDP figures revealed a sharp 4th quarter contraction of an unrevised -1.5%. A breakdown of these figures showed a 4.5% decline in industrial production and a 2.3% decline in investment. The only expansion came from Government services which grew by 1.5% and David Blanchflower of the MPC is predicting first quarter GDP to be significantly worse. This morning the Pound has suffered further following news that RBS posted a loss of £24.1 billion in 2008, the largest in corporate history. This was blamed on ‘unprecedented turbulence’ in financial markets and the bank expects further difficulty throughout 2009. After paying the government £6.5 billion worth of preferential shares to take part in the Asset Protection Scheme, the bank is to place £300 billion worth of troubled assets with the UK taxpayer. Nationwide building statistics released this morning show house prices have fallen 1.8% in February, taking the average house price down 17% from a year ago. There is no further data in the UK today.

US Dollar - US Markets

The Dollar is down against the Pound and Euro this morning as weak home sales figures yesterday damaged the Dollar’s safe haven image. The Dollar is also down against the Canadian, Australian and Kiwi Dollars as markets retain a small appetite for risk in the wake of comments from Ben Bernanke and President Obama yesterday.

News that US home sales fell by 5.1% in January capped Dollar gains yesterday. The Federal Reserve expects an upturn in growth to take place in the third quarter of 2009 and despite recent rallies, this news is muting the tone in UK and European equities, as growth here is expected to follow the US by approximately three months. A raft of US data is out today from jobless claims to durable goods orders and market sentiment is likely to be the primary determinant of currency exchange rates.

Euro – European Markets

The Euro is up against the US Dollar this morning, trading at 1.27 and the Euro-Pound exchange rate is currently 0.89. The Euro has also strengthened on the Yen and it’s other Asian currency partners.

European equities remain positive this morning following Ben Bernanke’s announcement that the Federal Reserve would not be looking to nationalise major American banks. UBS shares rose yesterday after Switzerland’s biggest bank hired the former CEO of Credit Suisse to restore market confidence. The news was interpreted positively by markets and Europe’s Dow Jones climbed 1.9%. The German unemployment rate has risen to 7.9% as a further 40 000 people were made jobless in February as recession deepens in the Eurozone’s largest economy. Today markets will be interested in consumer, industrial and economic confidence figures to be released in the Eurozone.

Other Currencies - Highlights

The Yen fell to a three month low against the US Dollar and weakened against the Euro overnight after figures yesterday revealed a 46% drop in exports. The Yen is heading for its worst month against the Dollar in 13 years and faces threats to its status as an international safe haven as the country is hit increasingly hard by the global recession. A series of significant data is released in Japan today, including industrial production, consumer price index and retail trade figures.