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Sterling is under pressure this morning over losses in the banking sector. Lloyds is yet to strike a deal with the Treasury over inclusion in the Asset Protection Plan and HBOS has announced over £10 billion worth of write downs for 2008. GDP figures out in the US later today will be a source of interest for markets as growth prospects in the world’s largest economy remain a key driver of economic sentiment and currency exchange rates.

Pound Sterling – UK markets

The Pound has declined against the Dollar overnight and is also lower against the single currency as losses in the banking sector dominate headlines in the UK. Markets have gained some solace over the level of Government commitment to the bail out but the prospect of rising government debt is anchoring Sterling to the bottom end of trading ranges. The Pound has gained on the Australian and New Zealand Dollars as appetite for risk diminishes ahead of US GDP figures out today.

Yesterday Sterling suffered in response to the news that the Government would increase its stake in RBS to 84%. Current predictions show the level of taxpayer ownership could rise as high as 95%. Shares in fellow banking giant Lloyds have plummeted 7.4% this morning following news that the bank is yet to strike a deal with the Treasury to insure over £200 billion worth of toxic debt. Despite posting a profit of £807 million in 2008, Lloyds shares have been dragged down after the acquisition of HBOS late last year. HBOS lost £10.8 billion before tax in 2008. UK consumer confidence rose slightly in February, up 2 points from January as the effects of monetary easing are starting to work their way into the economy. There is no further data in the UK today.

US Dollar – US Markets

The Dollar has spiked against the Euro and Pound this morning ahead of annualised US GDP and personal consumption figures to be released later in the day. Investors remain uneasy about what these announcements will bring and this is fuelling risk aversion which is driving Dollar strength. The US Dollar is up over 1% on the Australian and Kiwi Dollars and has gained 0.95% on the Pound.

Growth prospects in the US remain a key indicator of market sentiment and currency exchange rates. An annualised contraction of -5.3% is expected for the fourth quarter following a 0.5% annualised contraction in the third. This represents the drastic decline in the US economy following the market shocks in late 2008. Personal consumption expenditure will also be viewed with interest as consumer spending accounts for 70% of the US economy. The Obama administration has instructed Citigroup to find a private source of capital after committing $45 billion to the bank last year. Shares in Citigroup fell below $2 for the first time in 18 years this week amid speculation that the Bank would be subject to nationalisation. GDP and personal consumption figures are out later in the day.

Euro – European Marketsrrencies

The Euro remains bearish this morning due to a combination of risk aversion, lower commodity prices and the prevailing market view of economic deterioration in the Eurozone. The Euro is up against the Pound, Australian and New Zealand Dollars although has suffered declines against its other currency partners including the Yen, Canadian and US Dollar.

European equities were in retreat yesterday amid concerns over commodity prices and the economic situation in Eastern Europe. The Hungarian Prime Minister has requested a ?180 billion aid package for Eastern Europe which is set to include recapitalisation for banks and restructuring of foreign debt. The rapid depreciation of national currencies is also a pressing concern. The Polish Zloty has dropped 29% against the Euro in the last 6 months and other currencies have suffered similar declines. The EMU consumer price index and employment rate are out today along with the consumer price index for Germany.

Other Currencies – Highlights

Australian markets received a boost overnight as strong capital spending figures triggered confidence in the economy to weather global recession. Capital spending in the final quarter of 2008 showed a 6% rise despite expectations of a 3% decline. Capital spending makes up 10% of GDP and this sent the Australian Dollar higher against the US Dollar. The return of risk aversion this morning though has seen the US Dollar recover over 1% on the Aussie. The RBA interest rate decision is due next week.

Canadian stocks have rallied overnight as three major banks posted higher than expected profits. The National Bank of Canada, Royal Bank of Canada and Canadian Imperial Bank of Commerce each gained more than 6% after making profits without the help of government aid, boosting investor confidence in the sector.

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The ECB reduced its base interest rate to 2% yesterday in a move that was widely expected by markets. A volatile day of trading saw Bank of America shares lose over 20% and the London FTSE 100 also closed with significant losses. Consumer inflation and industrial production figures from the US are likely to be the major market movers today.

Pound Sterling – UK markets

The Pound strengthened against the US Dollar overnight, trading just below 1.5 this morning and is up 1% on the Euro to 1.12 following the ECB decision.

A turbulent day of trading saw the FTSE tumble in response to uncertainty in US equity markets yesterday. Lloyds shares fell by 11% while Barclays and HSBC suffered 8% and 7% declines respectively, wiping out the hard won gains after the recent market shocks. This morning the Pound has strengthened against the Dollar and Euro as Congress rescue packages and ECB rate cuts increased risk appetite internationally. Economists are predicting a return to positive growth in the fourth quarter of 2009 at present as it takes 1-2 years for rate reductions to work their way through the economy. There is no data out in the UK today.

US Dollar – US Markets

The Dollar has suffered against its major currency partners as a barrage of negative US economic data this week has allowed Sterling and the higher yielding currencies to consolidate against the Dollar.

Bank of America has been granted a $138 billion rescue package by Congress this morning which includes $20 billion of financial aid and $118 billion worth of guarantees. Shares in the Bank and Citigroup slumped yesterday ahead of profit losses which are expected to be larger than initially thought. The Philadelphia Manufacturing Survey showed the weakest performance in 40 years and underlying market trends remain bearish. The inauguration of President Obama next week and the announcement of further Congressional rescue packages are likely to be a source of market optimism next week. Economists are predicting upturn in the US economy could begin in quarter 2 at the earliest and is likely to precede recovery in the UK and Eurozone by around 3 months. The Consumer Price Index and Industrial Production Figures are out in the US today.

Euro – European Markets

The Euro has continued to lose ground against the Pound this morning, trading at 0.88 and 1.32 versus the Dollar.

Yesterday the ECB cut the base interest rate by 0.5% to 2%. This was widely expected by markets as industrial production and inflation figures have shown the Eurozone economy in rapid decline. Inflation fell to 1.6% in December from 2.1% the previous month prompting predictions that a short period of deflation may occur. Greece, Ireland, Spain and Portugal are the latest members of the Eurozone to be put on credit alert by the Standard and Poor’s which added to pressure on the Euro. Trichet ruled out the further interest rate reductions until March in his accompanying speech. The EMU trade balance is out today.

Other Currencies – Highlights

The New Zealand and Australian Dollars continue to remain vulnerable to international movements in the absence of important economic data. New Zealand house prices fell 2.7% in December, which weighed on the New Zealand Dollar yesterday and the Aussie lost 0.9% against the US Dollar overnight. The Central Bank of Turkey is due to make an interest rate decision today although consumer inflation figures in the US are likely to be the major market movers.

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