Pound Sterling - UK Markets

The Pound is gaining ground against the US Dollar this morning, having slipped back to 1.45 after balance of trade statistics were released yesterday.

UK deficit in goods and services has widened to £4.5 billion in November, up from £3.9 billion the previous month. This is in reflection of reduced exports, primarily to the US and Eurozone and was mirrored by US figures yesterday which showed a drastic decline in imported goods and reduced trade deficit. Job losses in the UK also show no sign of abating with Merrill Lynch and Barclays both announcing significant job cuts yesterday. The Government has announced a £20 billion plan to proved finance for small businesses but this has done little to support the Pound, as investors continue to favour safe havens. MPC minutes released next week are likely to provide some insight into the prospect of further interest rate cuts in February. There is no significant data for the UK for the rest of the week.

US Dollar - US Markets

The US Dollar was buoyed overnight by a larger than expected contraction in the US trade deficit. The Dollar is trading at 0.68 versus the Pound and 0.75 versus the Euro this morning.

The total trade deficit was reduced by over 28% to -$40.4 billion as reduced consumer demand and lower oil prices affected import figures. This is the biggest contraction in 12 years and served to strengthen the US Dollar yesterday. Oil has risen for the second day as OPEC signalled deeper production cuts due to reduced demand. Today market focus will be on crucial US retail sales figures and the Fed's Beige Book.

Euro - European Markets

The Euro strengthened against its major Asian currency partners overnight but is still trading at low levels amid the market view that the ECB is not doing enough to combat the economic downturn.

German GDP figures show the economy grew 1.3% in 2007 following a 2.5% expansion in 2007. This is the weakest GDP figure in 3 years and as Germany is the largest economy in the Eurozone, is likely to be mirrored by fellow members. The German economy is expected to continue to contract in Q1&2 of 2009. European equities are in negative mode due to uncertainty over the extent of the credit crunch and looming rate cuts on Thursday. The ECB has cut rates by 1.75% since October with a further 0.5% cut expected next week. Industrial Production figures are due from the Eurozone today.

Other Currencies - Highlights

The Aussie Dollar reached a one month low against the US yesterday as US balance of trade deficits showed a larger than expected contraction. The Kiwi Dollar has suffered amid news that Standard and Poor's is considering revising the foreign currency rating of the Kiwi Dollar. At present the Kiwi is highly dependent on external funding to service its account deficit and a withdrawal of international funds could have serious implications for the New Zealand economy. Business sentiment in New Zealand has also reached a 33 year low. US Data out today could entrench risk aversion at the expense of the Kiwi and Aussie Dollars and Australian employment figures are due tomorrow.