Pound Sterling - UK Markets

Sterling is currently faring well against the US Dollar, trading at approximately 1.5 ahead of the Bank of England interest rate decision. Against the Euro the Pound is up to 1.11 as markets appear to be focusing on the long term impact of interest rate reductions.

The current base rate is 2% in the UK and a reduction will bring interest rates to the lowest level since the Bank was founded in 1694. This could provide some underlying support for Sterling as economic slowdown in the Eurozone appears to be gathering momentum. The Bank of England is seeking to find a balance between lowering interest rates to stimulate economic growth while at the same time preventing deflation. However with interest rates approaching zero, the Bank is testing the limits of monetary policy and may need to look to more unconventional measures to stimulate cash flow. Quantitative easing, a tactic used in Japan has been mooted as an option for the future. The Nationwide Building Survey announced yesterday house prices fell 15.9% in 2008 and the weak labour market is likely to keep the housing market under pressure. Industrial, manufacturing and producer price indices are due in the UK tomorrow.

US Dollar - US Markets

The US Dollar is largely unchanged against its major currency partners although is weaker against the Yen as investors continue to favour risk aversion internationally.

Private sector employment figures in the US showed 693 000 job losses in December, the highest amount in seven years. The Dollar weakened over 3 cents against the Pound in response to the news and continues to trade in the region of 1.5 despite the pending Bank of England interest rate decision. Friday brings the announcement of non-farm unemployment in the US and is expected to bring further evidence of recession in the US economy.

Euro - European Markets

The Euro is weaker against both the Dollar and Pound this morning as deflation continues to be a major worry of the ECB.

Swiss CPI has declined 0.5% at consumer level in December and jobless rates in Spain have hit 3.1 million. The EU unemployment rate rose to 7.8% in November, up from 7.7% the previous month. Today's news also shows declining consumer confidence and GDP in the Eurozone heightening the possibility of interest rate cuts. Retail sales figures are due out tomorrow. 

Other Currencies - Highlights

The Australian and Kiwi dollars weakened yesterday as unemployment figures in the US forced commodity prices to drop. This morning however, the Australian Dollar has gained 1.6% on Sterling and 2% on the US Dollar ahead of expected interest rate cuts making the high yielding currencies more attractive to investors.

The political situation in Gaza has seen risk aversion rise with the Yen gaining for the fourth consecutive day against the Euro. The Swiss Franc has also risen against the other European Currencies as the combination of economic and political turmoil causes investors to seek safe assets.