Pound Sterling - UK Markets

Sterling exchange rates have declined against the dollar and yen this morning, currently trading at 1.62 and 150.94. The pound has gained against the Australian and Kiwi dollars and has recovered against the euro to 1.17.

Market reaction to the MPC decision yesterday was muted as the Bank decided to leave interest rates on hold at the historic low of 0.5% and maintain current QE levels. Despite the BCC arguing that an expansion of QE was necessary to underpin business confidence, the MPC stated that QE levels would be reviewed in August inline with inflation targets. Annual producer prices in the UK fell 1.2% on the year to June, the largest fall since 2001 as recession capped inflation levels. Retail sales and consumer spending data is out next week.

US Dollar - US Markets

US dollar exchange rates have maintained their strength this morning, gaining 0.8% on the euro and 0.4% on the pound. The US dollar/yen exchange rate remains largely unchanged as economists debate the sustainability of economic recovery.

Economists have predicted the US is on the "cusp of stabilization" and forecast growth to expand in the latter half of 2009 as growing consumer confidence, a retail stales revival and a more stable property sector support growth. Unemployment will likely remain a drag on the economy, peaking at over 10%. Today GM is set to emerge from bankruptcy as a revamped company underpinned by 60% government ownership. The Canadian government will also own a 12% share in the new company. Foreign exchange markets will be interested in US trade balance figures out this afternoon.

Euro - European Currencies

Euro exchange rates have weakened across the board this morning following reports of increased IMF aid to the region. The single currency is currently valued at 1.39 versus the dollar, 129.11 versus the yen and 0.85 versus the pound.

The euro has fallen the most in a week against the Japanese yen following reports that the IMF is in talks with 10 Eastern European countries to increase financial aid. Eastern Europe has been hit hard by the recession, with many nations including Bulgaria and Croatia, claiming aid for the first time. The German wholesale price index has risen 0.9% on the month, but remains on track for an annual decline of -8.8%, prompting further fears over the sustainability of economic recovery. ECB President Trichet is due to speak on Monday.

Other Currencies - Highlights

US dollar/Japanese yen exchange rates are largely unchanged this morning as reduced risk appetite in Asian markets has kept yen exchange rates strong. The yen has also gained 3.8% in the last week against the euro. This is despite Japanese wholesale prices falling 6.6% in the year to June, raising fears of a deflationary spiral reminiscent of the 1990s in Japan. The Bank of Japan interest rate decision is due early next week.

Canadian unemployment levels are also out today with a rise to 8.7% expected by markets. In combination with the US trade balance, we will likely see some volatility in North American foreign exchange markets later in the day.