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US data released yesterday showed better than expected retail figures for February, and Bank of America announced that they expect to operate profitably in 2009. This led to a surge in equity markets and a rise in risk appetite for investors with the MSCI world index making its biggest rally since November. Japan and China also signalled an increase in efforts to boost growth leading Asian and European equities higher.

Pound Sterling – UK markets

The Pound has risen this morning on the back of improved market confidence but remains trading at low levels internationally. Sterling is currently struggling to find support above 1.4 on the Dollar and remains weak against the Euro.

Yesterday the Bank of England declined to provide ‘sector specific support’ to the ailing automobile industry and this led the Pound to fall against the Euro. This morning the FSA has announced the introduction of more draconian regulations to prevent risky investments being undertaken by banks. With an absence of major data in the UK, Sterling exchange rates are subject to international risk trends and positive retail sales figures in the US yesterday led Sterling to strengthen against its major currency partners. Next Wednesday brings the UK unemployment rate and this will be a source of volatility for the Pound. There is no data in the UK today.

US Dollar – US Markets

The Dollar has lost ground this morning against its international currency partners as better than expected retail sales figures have boosted market sentiment. The Dollar is down against the Pound, Euro, Canadian, New Zealand and Australian Dollars.

US retail sales showed a 0.7% increase in February, a stronger gain than expected revealing an underlying positive trend in the US economy. This news, in combination with the announcement from Bank of America that they expect to make a profit in 2009, sent equities surging yesterday and redistributed funds resulting in better exchange rates for many of the higher yielding currencies against the US Dollar. Also in the US, Bernie Madoff has been jailed this morning for his $50 billion fraud after pleading guilty to all 11 charges. The US trade balance is released this afternoon.

Euro – European Markets

The Euro is holding strength this morning, gaining on the Yen and US Dollar while also trading at favourable rates against the Pound, Australian and Kiwi Dollars.

Despite the release of negative figures from Germany, the single currency gained on the Pound throughout yesterday’s trading. German industrial production fell by -7.5% in January, revising annual rates to -19.3%. This is indicative of the V shaped downturn the Eurozone is experiencing which is affecting Germany’s heavily export orientated economy. Germany is the largest economy in the EU and fifth largest in the world by levels of GDP. Economists suggest the decline in consumer confidence and demand could mean economic policy is to play an increasing role in global recovery. In the Eurozone, this could lead to a redistribution of production to some of the EU’s smaller economies. EMU retail sales are due today.

Other Currencies – Highlights

Asian equities have surged overnight and the MSCI index held its biggest rally since November as Japan and China both announced a broadening of rescue efforts. Speaking from a press conference in Beijing, Chinese Premier Wen Jiabao defended China’s economic policies and announced they expect world growth to return to normal by 2010. The government growth target this year is 8%. In November China announced a 4 trillion yuan (£420 billion) rescue package and international economist suggest years of high growth and a tightly managed budget will support the Chinese economy throughout 2009.

The Japanese Prime Minister has ordered a third government rescue package as the Japanese economy suffers due to the recent strength of the Yen. Japanese consumer confidence and industrial production figures are due today.

The US economy contracted 0.5% in the third quarter sending global equity markets lower yesterday. The US accounts for 25% of global GDP and economic contraction in the US has significant implications for global market confidence. Otherwise, market movement is limited due to the holiday period.

Pound Sterling – UK Markets

The Pound is sitting at 1.47 versus the US Dollar and trading at 1.05 versus the Euro this morning after taking a further battering following the release of third quarter GDP data.

The Office of National Statistics announced yesterday a 0.6% economic contraction in the third quarter, the fastest rate for nearly 20 years. Production output declined 1.4% and the service sector shrunk by 0.5%. Government services remain the only growing sector of the economy at present and BBA figures showed new mortgage approvals have also fallen by 60%. There is little economic data between Christmas and New Year and Sterling is likely to occupy low ranges as markets price in expectations of a further interest rate reduction on January 8th.

US Dollar – US Markets

The Dollar has declined against the Pound and Euro, suffering from the release of GDP statistics yesterday which showed the US economy contracted by 0.5% in the third quarter.

World equity markets lost ground on the news as the US accounts for 25% of the global economy. Home sales and prices also fell at record levels which had the effect of bringing the price of crude back to $40 a barrel. Jobless claims, personal income and spending figures are released in the US today and could induce some volatility in the Dollar rate.

Euro – European Markets

The Euro retained its strength overnight, as Sterling and the US Dollar suffered from the release of negative economic data. The Euro is currently at 1.39 versus the US Dollar and 0.95 against the Pound.

Spain has become the latest in the long list of countries to officially join recession and the ECB is not ruling out further interest rate cuts, commented Ewald Nowotny yesterday. Nowotny is a member of the ECB Governing Council member and head of the Austrian central bank. Data has been light in the run up to Christmas for the Eurozone and there are no major figures over the coming days which indicate we could see the continuation of the Euro’s bullish run on Sterling and the US Dollar.

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The Federal Reserve slashed interest rates to an unprecedented 0.25% yesterday, making the current base rate the lowest in US history. The decisive reduction was announced amid further ‘quantitative easing’ measures to stimulate the economy and ward off deepening recession. The US Dollar depreciated following the news and global equities climbed.

Pound Sterling – UK Markets

Sterling has recovered substantially against a broadly weaker US Dollar, currently trading at the 1.55 level. Against the Euro the Pound continues to slide, reaching a new low yesterday and sitting at 1.103 this morning.

The Office of National Statistics announced this morning that unemployment hit 1.86 million in the three months to October. David Blanchflower, labour market expert from the Bank of England, has warned unemployment is set to reach 3 million during the current recession. The weakening labour market will continue to weigh on Sterling as employment is a key factor in consumer confidence and business sentiment. Retail and consumer price inflation figures yesterday showed inflation declined to 4.1% in November from 4.5% the previous month. The Bank of England’s inflation letter announced rates could move ‘materially’ below the official target of 2% in the second half of 2009 as lower energy prices, interest rate reductions and heavy discounting from retailers drive prices lower. Today the Bank of England Minutes are released and these could provide clues as to further rate decisions in 2009. Economists are currently predicting UK base rates could fall to 1% which is also a source of pressure for the Pound.

US Dollar – US Markets

The US Dollar depreciated internationally following the Fed’s interest rate decision. Reaching a 13 year low against the Japanese Yen yesterday, the Dollar remains low against its international partners this morning as market confidence increases risk appetite internationally.

The FOMC reduced the US base rate to 0.25% yesterday, taking interest rates to their lowest level in the history. The 0.75% reduction is essentially a zero interest rate policy and was accompanied by Federal pledges of more unorthodox measures to stimulate the property market and ward off deepening recession. Wall Street jumped 4.2% in response to the news and equities climbed around the world. The price of oil has also risen for the first time in 4 days after OPEC announced a cut in production by 2 million barrels a day. This also contributed to Dollar weakness and OPEC could find themselves in a Catch 22 as attempts to raise the price of oil potentially undermine global recovery prospects. Today is light for US data with the Philadelphia Fed Manufacturing Survey, a key indicator of manufacturing sentiment, due tomorrow.

Euro – European Markets

The Euro continues its bullish run on the Pound and US Dollar this morning, up 0.48% against the Dollar and nearly 1% against the Pound.

While interest rate cuts and inflation data in the US and UK have dominated the global headlines this week, the Euro has remained out of the spotlight and benefited from collective stability. Consumer Price Inflation rates are due from the Eurozone today and these could indicate the extent to which deflation is likely to become an issue in 2009. The ECB has signalled it will not continue to cut interest rates into 2009 and has limited scope compared to its international counterparts to do so which could affect the value of the Euro in future. The Bank of Japan’s interest rate decision is also due on Friday.

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