US dollar weakens against sterling

The dollar weakened yesterday as traders began investing in riskier higher yielding currencies following positive US housing data. There was limited trading in anticipation of the interest rate decisions from the Bank of England and the European Central Bank tomorrow. The ECB is likely to maintain interest rates at 2%, whilst the Bank of England is expected to cut further by up to 100 basis points. Usually a currency is weakened by interest rate cuts, but there is speculation that the pound may instead strengthen on the back of any cuts as the move points to a positive economic stimulus.

The pound also strengthened yesterday following a report on the UK construction sector, which showed that it rose to 34.5 in January from the 12 year low of 29.3 set in December.

There are several significant announcements taking place in the US today including ADP Employment Change and MBA Mortgage Applications. In the UK, the BRC Shop Price Index will be released at 10.00 GMT.

Pound remains under pressure against the euro

The pound remained under broad selling pressure against the single currency yesterday, as poor economic fundamentals and a looming interest rate cut took its toll on sterling. Data released early on Tuesday showed the construction industry rose to 34.5 in January after a fall to 29.3 in December. But that was the 11th month running the index has been below 50, the level which marks contraction, confirming the poor state of the UK’s economy at present. Investors are also wary of another interest rate cut tomorrow, with the Caxton FX analysts forecasting a 0.5% cut by the Bank of England to another historic low of 1%, whilst the European Central Bank are expected to keep rates on hold at 2%.

Retail sales figures are released in the eurozone this morning, whilst PMI services data is released in the UK and the eurozone.

US dollar loses ground to the euro

The US dollar slipped against the euro yesterday as investors sold the safe haven dollar on the back of a positive US housing report and action by the Federal Reserve aimed at underpinning liquidity amid the global financial crisis.

The National Association of Realtors struck an unexpected note of hope for the devastated US housing market, in a deepening slump since 2006. NAR reported pending home sales rose 6.3 percent in December, confounding most private economists' expectations of a flat reading. In addition, the Federal Reserve announced a six month extension of temporary programmes designed to inject liquidity into the financial markets.

Eurozone Retail Sales and PMI Services data is released this morning, while in the US employment data and MBA Mortgage Applications figures are released this afternoon.

New Zealand dollar rebounds

The New Zealand dollar rebounded against most of the majors yesterday after it was aided by an easing in global risk aversion. With no major local data out, the kiwi was directed by broader market movements. Markets are speculating that the NZ central bank still has more work too do, which is likely to keep the kiwi generally weaker in the short to medium term.

Aussie dollar makes gains against the pound

The Australian dollar clawed back further ground against sterling yesterday, after stock markets gained ground following renewed optimism in the US about a new stimulus plan. This gave some relief to investor risk aversion, which helped the aussie hold on to much of its previous gains. As expected, the Reserve Bank of Australia cut rates by 100 basis points. The market was also given a boost with the government announcing a A$42 billion stimulus package. However, while many took this as a positive some in the market argued that due to the global factors at play it would still not help the Australian economy from heading into recession.