Pound Sterling - UK Markets

The pound shed 0.57 pence against the euro yesterday as exchange rates dipped due to investor fears over the state of the UK budget deficit. This morning the pound has continued to decline, falling to 1.63 against the US dollar and 1.15 against the euro.

With government debt currently running at 56% of GDP, there are growing concerns over how the government plans to tackle the massive debt that could prove inflationary. Charles Bean noted that the weak pound is stimulating the economy through improved export prices and this is aiding UK recovery. This morning's MPC minutes show the committee unanimously voted to leave QE levels unchanged, as they felt the slowing pace of decline meant no further stimulus was necessary in July. The MPC will meet again in August.    

US Dollar - US Markets

US dollar exchange rates have strengthened following Bernanke's speech to Congress yesterday in which he outlined US economic prospects. This morning the dollar has gained against all its major currency partners with the exception of the yen, climbing to 0.70 versus the euro and 0.61 against a weaker pound.

Ben Bernanke gave a cautious assessment of the US economy to Congress yesterday, stating that while there are "tentative signs of recovery" the situation is highly unstable and Fed policy will be focussed on "fostering economic recovery". He also noted that unemployment will likely remain high into 2011 with a slow and gradual climb out of recession. With no tightening of monetary policy due in the immediate future, risk appetite took a hit, sending the yen and greenback exchange rates higher. The house price index is due today in the US. 

Euro - European Markets

Euro exchange rates are mixed this morning, climbing against the higher yielding pound, Australian, New Zealand and Canadian dollars while losing ground to the yen, US dollar and Brazilian real.

Industrial new orders across the eurozone have fallen -0.2% this month, taking the annual rate of decline to -30.1%. This is in line with falling industrial production across the region as recession contracts almost all sectors of the economy. European equities gained 0.8% yesterday and the euro remains firm in the region of 1.42 against the US dollar. There is no further data in the eurozone today with current account figures due tomorrow.

Other Currencies - Highlights

Australian dollar exchange rates reached a one-month high against the pound overnight, as consumer inflation figures slowed to 0.5%, the lowest level in a year. In combination with negative news in the UK, this allowed the Australian dollar to consolidate on the pound. The news also suggests that the Reserve Bank will leave interest rates on hold for some time.

Japanese yen exchange rates have surged overnight, amid concerns over the pace of global economic recovery. The Japanese yen gained the most against the euro, South African rand and British pound as low risk appetite in the market led investors to seek out the safe havens.