Pound Sterling - UK Markets

Sterling is weaker this morning on the back of an increase in risk aversion and unease surrounding UK economic prospects moving into 2009. The Pound has declined against the Dollar and Euro, trading at 1.42 and 1.11 respectively and is also weaker against the Yen and Canadian Dollar. 

The Confederation of British Industry has this morning predicted the UK economy will contract by 3.3% in 2009 and that government debt will rise to £1.48 billion. This is significantly more than the £1.18 Darling outlined in the latest budget and has added to pressure on the Sterling-Dollar exchange rate. The UK car industry continues to suffer, with BMW announcing 850 job cuts from their Oxford factory. This Wednesday sees publication of the MPC minutes which will likely provide clues as to further interest rate reductions and monetary easing policy. Market consensus is for a 0.5% reduction in the base rate in March but following this the Bank will look towards more unconventional methods of monetary easing. Talk of quantitative easing and uncertainty as to the way forward will continue to pressure Sterling. Consumer and Retail price indices are due in the UK tomorrow.

US Dollar - US Markets

The US Dollar has strengthened overnight, supported by an increase in risk aversion after the failure of the G7 to produce results. The Dollar has gained to 0.70 versus the Pound and 0.78 against the Euro, as well as strengthening against its major currency partners.

Pressure is mounting on Treasury Secretary Geithner to provide specifics on the Federal Reserve package as markets continue to look to the US for cues in jumpstarting the global economy. A blueprint for recovery in the US would create positive sentiment in US equities and spread around the world, boosting a revival in risk appetite and fuel a growing sense of consumer confidence. News that US GDP contracted 3.8% in the final quarter of 2008 alongside Japanese and European contractions, means uncertainty over growth prospects continues. Wall Street is closed today for a bank holiday in the US.

Euro - European Markets

The Euro has weakened this morning as Friday's GDP figures and the G7 conference over the weekend fuel an increase in risk aversion. The Euro is currently trading at 1.27 against the Dollar and 0.89 against the Pound.

GDP figures released on Friday showed the deepest contraction on record for the Eurozone in the fourth quarter of 2008. Germany, France and Italy also showed significant growth contractions and IMF Director Dominique Strauss-Kahn has predicted a ‘second wave' of financial weakness as cash strapped governments turn to international organizations for help. European equities are bearish this morning on the back of weak data out from Japan and the UK. The EMU trade balance is out tomorrow.

Other Currencies - Highlights

Japan's economy shrunk 3.3% in the final quarter of 2008, taking the annual decline to -12.7%. This is significantly more than in the US and Eurozone and has been fuelled by the strong Yen and declining export demand. Japan's economy is the world's second largest and is currently in the unique position of having an artificially strong currency despite a deteriorating economic outlook.

The Australian and New Zealand Dollars also weakened overnight as G7 ministers warned of the ‘severe' global recession that would persist throughout 2009. The Australasian are likely to remain vulnerable as investors dump riskier currencies at a time of unprecedented economic uncertainty.