Senate Fails to Reach Agreement
Pound Sterling - UK Markets
The Pound is back down to 1.48 against the US Dollar as market confidence takes a hit after the failure of the Senate to agree on a rescue package for the ailing automobile industry. Against the Euro the Pound is down to 1.11, a record low for the third time this week as Sterling continues to be battered by weak data and investor risk aversion.
Yesterday the CBI Trends Survey showed a distinctly negative outlook in the UK and the Bank of England Inflation Survey revealed inflation is expected to plummet below the official target of 2% in 2009. Consumer Price Inflation peaked at 5.2% in September but fell away to 4.5% in October with the decline fuelled by plummeting energy prices and allowing more scope for further reductions in benchmark interest rates in 2009. Oil has declined to $45 a barrel from highs of $147 and reductions in VAT will also help inflation continue to fall. While the very low value of Sterling would normally benefit exporters and inflation rates, current market conditions are mitigating these effects for UK business owners. There is no data due in the UK today with consumer and retail price indices, as well as the Bank of England's inflation letter released on Tuesday
US Dollar- US Markets
The US Dollar has gained 1% on the Pound this morning and is also up against the European currencies. The Dollar has also gained a notable 2.7% on the Australian Dollar and 2.25% on the Rand as global confidence plummets once again.
The failure of the Senate to reach an agreement on the US car industry sent Wall Street plunging and heightened fears of job losses and industry collapse yesterday. Debate over wage cuts collapsed the bi-partisan negotiations and Japan's Nikkei Index lost 5.6% while shares in Toyota, Honda and Nissan all fell by over 10%. The ‘big three' car manufacturers in the US employ around 250 000 people and GM and Chrysler say they run the risk of collapse without immediate aid. The news heightened risk aversion internationally which served to consolidate the US Dollar at the expense of the higher yielding currencies. Crude continues to rise above $45 a barrel ahead of the production meeting next Wednesday. Retail Sales and Producer Price Indices from the US are likely to be significant market movers today.
Euro - European Markets
The Euro remains above the 1.3 level versus the Dollar, sitting at 1.32 this morning and at record highs of 0.89 versus the Pound. Against the other European currencies the Euro has gained while declining 1.5% against the Yen as markets as risk aversion led to a surge in the Japanese currency overnight.
The ECB announced yesterday they expect production to slow significantly in the coming months and have revised Eurozone GDP forecasts down to 0.0-1% from 0.6-1.8% for 2009. Although parity with the Pound is the big news at the moment, we could see the Euro weaken significantly in the New Year when the extent of economic contraction in the Eurozone emerges. EMU industrial production figures are due this morning.