Pound Sterling - UK Markets

This morning the pound is trading at its highest level in 2009 against the US dollar, having risen above 1.55. Sterling exchange rates have also improved against the euro and yen and the pound is currently trading at 1.13 and 148 respectively.

Optimism surrounding recovery in the banking sector and the global economy has fuelled the boost in sterling this week. ONS figures released yesterday showed inflation is falling at the fastest rate on record, with prices declining by 0.4% in April. This takes the annual rate of inflation to -1.2% as interest rate reductions from the Bank of England and lower energy prices have reduced the cost of living. Minutes from the last Bank of England meeting showed all nine members of the MPC voted to leave base rates on hold at 0.5%. The MPC also voted to expand the quantitative easing programme by GBP50 billion rather than a full GBP75 billion. Inflation data had little impact on sterling yesterday and we could see more movement with the release of UK retail sales figures tomorrow.

US Dollar - US Markets

Results are mixed for the US dollar this morning against its international currency partners. The dollar has declined against the pound and euro on the back of improved market confidence, but gained ground on the yen which is under pressure after the release of negative GDP figures yesterday.

US banking giant, Bank of America raised USD13.5 billion in a share sale yesterday, made necessary after stress tests on US banks revealed the bank was in dire need of a cash injection. Last week Bank of America also sold an estimated 13.6 billion shares in China Construction Corp. after encouragement from Treasury secretary Geithner that banks should seek to raise funds independently. Global equities are in consolidation mode this morning although the underlying trend remains positive. Brent crude has settled in the region of USD58-60 a barrel. Minutes from the FOMC meeting are expected to be the major market influence in the US today with the results of the Philadelphia Fed survey due tomorrow.

Euro - European Markets

The euro has strengthened to trade above 1.36 against the US dollar on the back of improved appetite for risk internationally. The euro has weakened against the pound, Canadian and Australian dollars as positive market sentiment is fuelling gains in some of the higher yielding currencies.

Germany's producer price index released this morning shows a -1.4% decline in prices in April, taking the annual rate of decline to -2.7%. The ZEW index released in Germany yesterday soared from 18.1 points in April to 31.1 in May, showing that investors expect economic conditions in Germany to improve drastically in the coming months. This has boosted euro sentiment as Germany represents the biggest economy in the region. The euro is currently trading in the region of 0.88 against the pound although economists are predicting the euro could drop to a three-month low if support drops below the "resistance level" of 0.87. Switzerland's ZEW survey is due today with the EMU purchasing manager index for manufacturing and services due tomorrow.

Other Currencies - Highlights

The Japanese yen has weakened overnight after Japan announced a record GDP contraction in the first quarter of 2009. The economy shrunk by 4% from January to March, taking the annual rate of contraction to 15.2%. Japan's strong industrial base and large export sector have been particularly hard hit by the global recession which has reduced consumer demand for the automobiles and electronic goods Japan is famous for. The yen has also strengthened significantly over the last year making Japanese exports more expensive. However, recent figures have shown the decline in exports slowing down and the Japanese economy may be approaching a bottom. Economists are predicting the yen may weaken as improved confidence leads investors to distribute their funds more widely.

Canadian stock markets and the Canadian dollar have climbed throughout the week, benefitting from global recovery prospects and improved economic sentiment. While recession in Canada has been deep, economists are predicting it may also be short as recent data has shown an improvement in credit conditions, home sales, employment and commodity prices. Canada's banks have also avoided government bail outs and there is a view among economists that the economy may return to growth next quarter. With the consumer price index and leading indicators due today, we could see a further strengthening of the Canadian dollar.