Risk aversion dominates
Pound Sterling - UK Markets
The Pound has declined against the US Dollar this morning, returning to the 1.42 level amid the release of core inflation figures in the UK. Against the Euro, Sterling has strengthened to 1.12 and has also gained on the Australian, New Zealand and Canadian Dollars.
The UK Consumer Price Index has fallen by 0.7% in the month to January, dragging core annual inflation down to 1.3%. The Bank of England expects core inflation to fall to 0.5%, well below the 2% target as a result of a reduction in interest rates and significant monetary easing from the Bank. Declining oil prices and the reduction in VAT have also played a role in declining inflation rates and there are predictions deflation could occur for a brief period in the coming year. Lloyds is in the spotlight again this morning after reports it could be forced into further write downs after the acquisition of HBOS. Lloyds was forced to announce £10 billion worth of write downs last week and their share price plummeted as a result. The G20 Summit to be held in London in April is the next global economic forum and many leaders are hoping this will mark a turning point for economic recovery. PM Gordon Brown is already calling for a stronger mandate for the IMF to enhance their role as an economic watchdog. Minutes from the last Bank of England meeting are released tomorrow along with the CBI Industrial Trends Survey.
US Dollar - US Markets
The Dollar has reached a 3 month high against the Euro as weak GDP figures on Friday have placed the single currency under pressure. The Dollar is also stronger against the Pound, Yen and other major currency partners this morning as risk aversion continues to characterise markets.
US trading was light yesterday due to a public holiday and the Dollar has strengthened this morning as risk aversion continues to characterise investor activity. The Senate passed President Obama's $787 billion rescue package on Saturday, yet the plan is still subject to divisive party politics and received the support of just 3 Republicans in the Senate. Market response to the downscaled plan has been tepid and this is fuelling much of the risk aversion we are seeing at present. Next on the international agenda is the G20 summit to take place in London in April. A series of soft data is due in the US today with important housing statistics out tomorrow.
Euro - European Markets
The Euro has fallen to a 3 month low against the Dollar this morning of 1.26 and is currently trading at 0.89 against the Pound. The Euro has weakened after the release of GDP statistics in the Eurozone showed significant contractions in all the major economies.
European equities have been in negative mode following the announcement of weak Eurozone GDP figures and the sharp contraction in the Japanese economy in the final quarter of 2008. The export led German economy shrunk by 2.1% in the final quarter of 2008 and this was accompanied by over 1% contractions in France and Italy, which dragged Eurozone GDP down by 1.5%. While market consensus was initially that the Eurozone would be well placed to weather the recession, this appears not to be the case and the ECB is likely to make further rate cuts in their March decision. The ZEW Economic survey is out in Germany today along with the EMU trade balance.
Other Currencies - Highlights
The Australasian currencies are trading in lower ranges as risk aversion continues to dominate markets. Asian and European equities are lower after news that the Japanese economy contracted by the largest margin in 35 years giving the Yen and Dollar a boost as the expense of most of the higher yielding currencies. New Zealand service sector activity fell to a record low in January and this has also battered the Kiwi. Retail sales figures are out in Australia tomorrow.