Pound Sterling - UK Markets

Sterling exchange rates reached a four-month high against the US dollar yesterday but has trimmed gains to sit just above the 1.5 level. The pound is currently trading above 1.13 on the euro and has lost ground against the Australian, New Zealand and Canadian dollars. 

The gradual upward trend in sterling is a reflection of improved growth prospects for the global economy. While the current economic news remains grim, the trade orientated UK economy means sterling is likely to benefit from improved growth prospects. The UK is also viewed as less deeply entrenched in recession than the Eurozone and Japan and this too is supporting the pound. The PMI for the service sector in the UK has climbed to 48.7, from 45.5 the previous month, which is positive news considering the service sector represents 50% of the UK economy. Halifax figures out this morning show house prices fell 1.7% in April, taking the annual rate of decline to -17.7%. There is no further data in the UK today and the Bank of England interest rate decision is due tomorrow.

US Dollar - US Markets

The dollar is trading at lower levels against its major currency partners on the back of improved risk appetite. After touching on four-month lows against the pound and euro yesterday, the dollar is currently trading at approximately 0.66 and 0.75 respectively.

The results of "stress tests" on US banks are due tomorrow and this is likely to be a source of volatility for currency markets. Of the nineteen banks tested it is expected that Bank of America will need about USD34 billion in new capital while shortfalls at Citigroup and JPMorgan Chase & Co are expected to be more limited. Yesterday Ben Bernanke testified in front of the congressional Joint Economic Committee yesterday and reiterated the Fed's commitment to the quantitative easing programme. Investors took this as a good sign and market confidence improved, ultimately boosting exchange rates for the higher yielding currencies yesterday. Brent crude remains in the region of USD54 a barrel despite the relatively low spring time demand for the commodity. There is no major data due in the US today with initial jobless claims, another speech by Ben Bernanke and the stress tests results due tomorrow.

Euro - European Markets

The euro also reached a four-month high against the US dollar yesterday on the back of strong equities and positive sentiment in the US. This morning however, the euro has dropped back to 1.32 against the dollar ahead of the ECB interest rate decision tomorrow.

EMU retail sales figures have remained flat for March, declining by 0.6% for the second month in a row. The Purchasing Manager Index for services in the eurozone released this morning showed an improvement in April, climbing to 43.8 after 43.1 the previous month. Plans for Fiat to take over the European operations of General Motors could result in over 10,000 job losses as the merger would create the world's second largest car firm. The German manufacturing sector is expected to be particularly hard hit. There is no further data in the Eurozone today with the ECB interest rate decision followed by President Trichet's speech due tomorrow. 

Other Currencies - Highlights

The Australian dollar reached a seven month high against the euro overnight as uncertainty over the ECB decision and improved risk benefitted the aussie and pressured the euro. The gradual upward momentum returning to commodity prices is benefitting some of the commodity based economies and the South African rand and Australian dollar have both regained ground recently. Australian retail sales figures have exceeded market expectations, climbing by 2.2% in March. The official trade balance also improved to AUD2.5 billion in March. The official unemployment rate and employment change figures are due tomorrow.