Pound Sterling - UK Markets

The Pound remains in the doldrums this morning, having lost ground against the US Dollar, Yen and Euro as investors favour risk aversion in the midst of deepening recession. Lacklustre trade data has kept the underlying trend in Sterling neutral.

Market reaction to the first gilt auction held by the Bank of England yesterday was muted and unease surrounding quantitative easing continues to weigh on the Pound. Yesterday official statistics revealed the UK economy in deficit to the tune of -£3.5 billion for goods and services in January. The deficit in traded goods fell to -£7.7 billion which is compatible with weaker industrial production figures for January. Sterling remains extremely weak internationally and the March unemployment rate will be a source of volatility for markets. Budget supermarket chain Morrison's has announced a 7% increase in profits on the back of higher sales during the credit crunch. Today there is no data of note from the UK and Sterling is likely to be driven by international risk trends.

US Dollar - US Markets

The Dollar is gaining ground this morning against its major currency partners as investors remain risk averse. The US Dollar is up over 1% on the Australian Dollar and Indian Rupee, while it has lost nearly 1.5% against the Yen as demand for safe havens continues.

US equities gained yesterday as JP Morgan Chase joined Citigroup in announcing a profit in the first two months of 2009. While it may be premature to say this indicates an end to the downturn, it does suggest greater stability in the banking sector and this was a source of confidence for equities in the US, Europe and Asia. US jobless claims and retail figures are due today and this is likely to be a source of volatility for currency exchange rates as retail sales are regarded as an important driver of the domestic and global economy. The US trade balance is out tomorrow.

Euro - European Markets

The Euro remains low against the US Dollar, Yen and Swiss Franc this morning amid speculation that industrial production figures for Germany are likely to be negative. The Euro continues to strengthen over the Pound and is trading at higher levels against the Australian and Kiwi Dollars.

The EMU producer price index has fallen -0.1% for January and is expected to show a 0.5% increase for the year. Recession continues to gather pace in the Eurozone and industrial production figures for Germany, the largest economy in the region, are expected to confirm this. ECB President Trichet has recently stated that ECB interest rates are likely to stay above 1% and this reluctance of the ECB to act is weighing on the Euro. Central Banks around the world have slashed interest rates in response to the credit crisis and the ECB remains curiously behind the curve. However, the ECB overnight deposit rate is 0.5% - the same as the MPC base rate - and this is helping to drive interest rates down for European banks. The ECB monthly report is due today and the Swiss interest rate decision is due tomorrow.

Other Currencies - Highlights

In Australasian markets, the Reserve Bank of New Zealand cut interest rates by 0.5% to 3% in an attempt to kick-start the economy yesterday. The reduction was in line with market expectations and the Kiwi rose to a two week high against the US Dollar following the announcement. In Australia the unemployment rate has risen to 5.2%, up from 4.8% the previous month. Unemployment is now at the highest level in 4 years and recession could be looming on the horizon for the Australian economy. New Zealand retail sales figures are due tomorrow and the unemployment rate is released in Canada.

GDP figures for Japan this morning show the Japanese economy shrunk -3.2% in the fourth quarter of 2008, taking annualized GDP down to -12.1%. This contraction is the steepest since 1974 and fuelled further gains in the Yen as investors sought to limit their risk by buying the perceived safe haven currencies.