Pound Sterling - UK Markets

Sterling exchange rates have dipped slightly this morning as investors remain cautious ahead of the Bank of England interest rate decision, although the pound remains supported above 1.5 on the US dollar and 1.13 against the euro. The pound is currently trading at 2.0 against the rising Australian dollar and 2.55 against the kiwi.

The MPC is widely expected to keep interest rates on hold at 0.5% and focus on quantitative easing in the coming months as the UK economy enters a recovery phase. By contrast the ECB is expected to make a reduction to the base rate and we are likely to see some sterling-euro volatility surrounding the announcements this afternoon. This morning Barclays has announced a pre-tax profit rise of 15% for the first quarter of 2009. The profit is largely due to a strong performance in the investment banking arm and comes despite the bank eschewing government bail outs late last year. The Bank of England decision is due at noon.

US Dollar - US Markets

The dollar has experienced choppy trading overnight as markets await the results of stress tests on US banks. This morning the dollar has gained 0.5% against the euro and 0.3% against the pound while also gaining against the yen and Canadian dollar.

US news is set to dominate international headlines today as results of the Obama administration's "stress tests" on major banks are due. The banking sector is crucial to recovery in the wider economy and the tests are designed to ascertain the level of stability in the major banks. Economists are predicting Bank of America to show the biggest credit shortfall with at least 10 of the 19 banks expected to need additional capital. Treasury Secretary Timothy Geithner reassured markets yesterday by stating that none of the major banks are at risk of insolvency. Official figures also released yesterday showed private sector job losses in April were at their lowest level in 5 months and this supported further market gains. Continuing jobless claims figures and a speech from Ben Bernanke are also due today.

Euro - European Markets

The euro is under pressure this morning, having dipped against most of its currency partners amidst uncertainty surrounding the ECB decision. The euro is currently valued at 1.32 against the US dollar and 0.87 against the pound.

The ECB is widely expected to reduce the base interest rate by 0.25% to 1%. ECB President Trichet has spoken in the past about more unconventional monetary policy and the ECB is expected to move towards quantitative easing to stimulate the eurozone economy. Uncertainty about how and to what extent the ECB will do this is pressuring the euro as quantitative easing is still regarded as a relatively risky policy. Switzerland's CPI released this morning shows a 0.9% rise in prices for the month of April, bringing annual inflation to -0.3%. German factory orders are also due this morning. The ECB decision, followed by a speech from President Trichet is due this afternoon and we can expect some exchange rate volatility in all the major currencies.

Other Currencies - Highlights

The pound has slid dramatically against the Australian dollar overnight, touching on a 12-year low as positive reports from the US economy and strong Australian retail sales improved confidence of a global recovery. The Aussie has been a major beneficiary of the recent bullish run in equities as improved export and commodity prices bode well for the trade orientated Australian economy. The Aussie dollar also reached a seven month high against the euro ahead of the ECB interest rate announcement this morning. Also released this morning was the Australian unemployment rate which has actually improved, falling from 5.7% to 5.4% for April. By contrast the New Zealand unemployment rate has increased to 5%, from 4.7% the previous month.