Pound Sterling - UK Markets

Despite trading at low levels internationally, the Pound has strengthened overnight to bounce back from another all time low against the Euro. Sitting just above 1.5 this morning against the US Dollar, the Pound is at 1.06 versus the Euro.

Sterling suffered another round of selling yesterday following news that government borrowing had reached record levels. The ONS showed government debt rose to £16 billion in November, £5 billion more than this time last year. The GFK consumer confidence survey released this morning has shown sentiment has improved in recent weeks and a 0.3% rise in retail sales for November support this case. It appears heavy discounting and a reduction in VAT may be working to stimulate consumer spending in the run-up to Christmas although concerns still exist for the new year. Trend-wise, Sterling remains bearish and some analysts claim the widening interest rate differential between the ECB and Bank of England is fuelling the depreciation of Sterling. The reduction of the UK base rate to 2% has inverted the normal rules of the Sterling/Euro relationship and this, combined with negative economic data, is channelling the currencies towards parity. With the prospect of further rate cuts in January almost certain, we are likely to see Sterling remain in very low ranges in early 2009. There is no further data from the UK today.

US Dollar - US Markets

The US Dollar has strengthened overnight against its major currency partners, up 1% against the Euro although it has slid against the Japanese Yen as interest rate cuts have failed to lower the appeal of the Yen internationally.

Yesterday the Federal Reserve slashed rates for overnight lending in a move that was widely expected by markets and designed to improve liquidity in the financial sector. The Philadelphia Fed manufacturing survey showed further contraction in the manufacturing sector, comparable to levels experienced in the 1981-1982 recession. Combined with the news that China has revised growth forecasts to 5% for 2009, this led oil prices to slide, reaching $44 a barrel amid uncertainty over the future of Asian and US growth. There is no data from the US today although GDP and Personal Consumption figures on Tuesday could induce some Dollar volatility.

Euro - European Markets

The Euro has weakened slightly overnight, losing 1% against the US Dollar and Pound but remains trading at the upper limits of its ranges against its major currency partners.

German Producer Price index figures yesterday showed the largest monthly decline since 1949, dropping by 1.5% from October to November. This was larger than predicted by economists and as the Eurozone's largest economy, proved to be a source of weakness for the Euro yesterday. The Euro is still benefiting from the lack of sharp interest rate reductions by the ECB and severely weak data coming out of the UK and US. There is no major data from the Eurozone today.

Other Currencies

The Japanese Central Bank has slashed interest rates overnight to 0.1%. The Bank reported fiscal conditions had ‘deteriorated sharply' as the Yen has reached 13 year highs against the Dollar recently, causing problems for Japan's export based economy. The Bank also revised growth forecasts to 0% for the 2009 financial year. The rate cut has failed to counter the rise of the Yen which continues to strengthen internationally this morning.

The Australian and New Zealand Dollars have slid back from their strong position early in the week as further negative economic data has dampened risk appetite internationally. The Australian Dollar reached 3 months highs against the Pound as expectations of further interest rate cuts continue to mount with Bank of England deputy governor Charles Bean stating UK interest rates could reach zero early next year. There is no data from Australia today and New Zealand's GDP and consumer confidence figures are due early next week.