Pound Sterling - UK Markets

Sterling foreign exchange rates are little changed overnight, with the pound rising to 1.64 against the US dollar and holding ground at 1.17 against the euro. The pound has however, sunk against its Asian and European currency partners following negative retail sales figures for May. 

UK retail sales declined -0.6% in May, following increased spending over the April Easter period. This puts the UK on track for a -1.6% contraction over the course of the year. Last night Bank of England governor King, in his Mansion House speech warned that UK banks may require fresh capital injections before they can commence a sustainable recovery. MPC minutes indicated that the medium term outlook has not changed, despite more positive economic data in the UK. We could see some foreign exchange rate volatility throughout the day as markets digest retail sales figures.

US Dollar - US Markets

US dollar foreign exchange rates are also mixed this morning, affected by a combination of risk aversion and profit taking. The greenback is weaker against the pound, yen and Australian and Kiwi currencies, while posting gains on the euro, Canadian dollar and Brazilian real.

Consumer price inflation in the US fell by 0.1% in May, taking the annual rate to -1.3%. This is the sharpest fall on the year since 1950. The current account deficit for the first quarter is also at USD-101.5 billion, greater than the USD-85 billion expected due to a contraction in economic activity. Risk aversion has returned recently, partly due to the growing view that risk appetite may have peaked as investors begin to contemplate long term growth prospects. The Philadelphia Fed, a key indication of manufacturing levels is out this afternoon, along with jobless claims and a speech from treasury secretary Geithner.

Euro - European Markets

Foreign exchange rates for the euro are firmer this morning, gaining against the pound and European currency partners following heightened risk aversion in the market. The single currency has strengthened over the Canadian, Brazilian and Indian currencies.

The Swiss national bank has decided to leave interest rates on hold at 0.25% and the euro has declined against the Swiss franc this morning. The EUR/USD foreign exchange rate remains in the region of 1.395 as investors debate whether markets have the ability to sustain the recent three-month rally. The European banking system could soon come under the international spotlight, following concerns over the health of US and UK banks. There is no data in the eurozone today with the German producer price index released tomorrow.

Other Currencies - Highlights

At the BRIC summit, Russia and China have agreed to boost the use of their national currencies through increased bilateral trade. This comes after the BRIC nations expressed doubts over the status of the US dollar as an international reserve. Yesterday the World Bank raised China's growth forecast to 7.2% for 2009, up from 6.5% in March.

Canadian foreign exchange rates strengthened against the US dollar overnight as crude oil prices increased for the first time in four days. The Canadian dollar tends to weaken along with oil prices and a decline in risk appetite. While market direction remains uncertain, foreign exchange rates for the CAD are likely to shadow commodities. The Canadian consumer price index is due today.