It could be a case of fools rushing in…. but I have agreed to do a charity skydive this month for Global Angels, an international children's charity. Your support would be greatly appreciated! http://www.globalangels.org/fundraiser/CurrencySolutions/

Ok endorsement over. The week which began here in London with a total white-out has ended with a white wash as Sterling has gone from strength to strength in the markets. Since Monday when snow blanketed the City and reminded us all to have a bit of fun the Pound has been trading at much firmer levels, maintaining support above 1.4 on the Dollar and 1.10 on the Euro. In these grim economic times that constitutes a very good week indeed!

The MPC decision to reduce the base rate to 1% has been interpreted as a piece of decisive policy and led the Pound to gain on the Euro. The ECB decided to keep rates unchanged at 2% and with figures showing the Eurozone deep in recession territory, the ECB is beginning to suffer for its complacency as reflected in the current Euro-Sterling exchange rate.

However, the UK does remain deep in the quagmire. G Brown even had a slip up over the D-word in Parliament yesterday. Plunging inflation, thousands of job losses and ever-worsening growth predictions remain very firmly in the economic picture and the IMF expect the UK to be one of the countries worst by the de… I mean recession. Baugur has become the latest high profile victim of the credit crunch after filing for bankruptcy protection yesterday and the NISER predict a 3.8% drop in consumer spending and an 8.8% decline in business investment in the UK in 2009.

So far, so depressing. What does seem to have changed is that markets are becoming somewhat de-sensitized to bad news. In the UK at least, recession has become an accepted state and markets are tending to focussing on more ambivalent results. 

The Dollar has conceded ground to the Pound in a week that has been relatively light for US data. The private sector shed 522,000 jobs in January and non-farm payrolls are likely to show a rise in the overall unemployment rate. The Federal Reserve rescue package remains in the Senate and we could see some Dollar strength and return of risk appetite when it gains Congressional approval. This week President Obama's ‘Buy America' clause came under fire from foreign leaders as a thinly veiled form of protectionism. Obama responded that he wants to avoid a ‘trade war' when global trade is necessary to financial recovery.

The Eurozone appears to be moving into the eye of the storm as figures show it is sinking deeper and deeper into recession. Retail sales have contracted 1.6% in the year to December and unemployment has risen rapidly in Spain, by 199,000 people or 6% in January. Spanish unemployment sits at 14.4%, significantly higher than other EU nations.

The Czech Central Bank has cut rates to 1.75% and other Eastern European currencies have declined significantly against the Euro since December. The Czech Koruna has dropped 7.1%, the Hungarian Forint by 11.2% and the Polish Zloty by 13.3%. It is expected that the Eurozone will continue to weaken in coming months as it moves into the trough of the downturn. As a global economic crisis that began in the US and spread to the UK and Eurozone, the consensus is that recovery will follow a similar logic and any upturn in Sterling is expected to trail the US by 1-2 quarters.

General market sentiment is that the Eurozone has done too little, too late with regard to decisive economic policy. While the Federal Reserve and Bank of England have undertaken significant monetary easing alongside rate reductions, the ECB continues to sit on its hands and this is lowering market confidence in the Euro.

While market shocks provided a large degree of the initial volatility, we are now seeing the downturn spread as it trickles into trade, tourism and contracts export markets. For many of the world's peripheral economies this is the beginning of a long slow downturn. For Eastern European currencies seeking to join the Euro this may delay the accession process. Stability is a key prerequisite and the current downturn is making it impossible to find. Poland is also the largest of the Eastern European economies, whether this enhances or diminishes the effects remains to be seen.

In the coming weeks, economic data is likely to get worse from the Eurozone, with little policy activity to remedy it. It seems the dovetailing towards parity we saw in the New Year has been left in the distance. At the same time, we are just moving into the period where MPC activity over recent months could start to make its mark on the UK economy. While it is too early to speak of recovery just yet and volatility is certainly not confined to the past, the general feeling is that markets have come to their senses and the extreme trading ranges we have seen may be abandoned in favour of smaller ranges. Call it learning to live with recession.

So have a good weekend and speak to your dealer if this has caused you even more confusion! And remember to donate to the skydive.

http://www.globalangels.org/fundraiser/CurrencySolutions/