Pound Sterling - UK Markets

Sterling has continued to plunge against its major currency partners, trading at 1.38 versus the Dollar this morning and 1.06 versus the Euro. While the revival of risk appetite yesterday allowed some of the higher yielding currencies to appreciate, Sterling remained exempt from the rally, battered by a lack of confidence in both the banking sector and the government's ability to rescue it.

With the prospect of further interest rate reductions and quantitative easing weighing on the Pound, Sterling fell to 1.36 yesterday. The MPC minutes revealed an 8-1 vote in favour of a 0.5% reduction with Blanchflower advocating a 1% cut increasing the likelihood of further reductions in February. Despite the second bail out of the banking sector, market confidence has continued to plunge as UK government debt is at 47.5% of GDP. The Pound has lost 35% from its high of 2.11 versus the Dollar. With fourth quarter GDP figures almost certain to show a contraction we could see Sterling continue to fall. There are no major announcements in the UK today with GDP and retail figures out tomorrow.

US Dollar - US Markets

Dollar volatility has been restricted to fairly tight ranges versus the Euro as risk aversion remains high on the international agenda, providing some strength for the world's foremost reserve currencies. The Dollar has dropped back from recent highs against the Aussie and Kiwi but continues its bullish run against Sterling.

Wall Street rallied yesterday after the Federal Reserve urged aggressive action on all policy fronts to halt the downward spiral of market confidence. Markets are still awaiting the announcement of a rescue package but with an expected value of $850 billion, this amounts to 6% of GDP. Housing stats released this morning showed a 3.2% decline in December from the previous month, the lowest level on record. US jobless claims are also out today.

Euro - European Markets

The Euro has strengthened this morning to 0.93 against the weakening Pound and 1.30 versus the US Dollar.

The ECB monthly report released this morning has announced inflation figures are ‘broadly balanced' in line with the 2% target. While instability remains a feature of markets, the ECB expects steady inflation to support purchasing power and wage growth, providing a degree of economic stability. Whether this will be the case or not remains to be seen. The Swedish jobless rate has risen to 6.4% in December from 6.2% in November and the producer price index for manufacturing and services in the Eurozone is out today.

Other Currencies - Highlights

The Australian Dollar has bounced back from recent lows against the US Dollar on the back of the equity market rally yesterday. The Kiwi gained on the Pound overnight and the fortunes of the Australasian currencies are likely to mirror global appetite for risk over the coming months. Commodity prices are firmer this morning which also tends to be positive for the South African Rand and Australian Dollar.

Japanese exports have plunged 35% year on year to December reflecting the downturn in global markets. The Bank of Japan left interest rates unchanged yesterday at 0.1%. The Bank of Japan monthly economic survey and Canadian consumer price index are out today.