ECB keeps rates on hold at 2%

In a scheduled announcement the European Central Bank has kept rates on hold at 2%. Analysts had been expecting this decision, as ECB President Jean-Claude Trichet had previously hinted that the next rate cut would not come until March.

Bank of England cuts rates by 0.5%

In a scheduled announcement the Bank of England has cut British interest rates by 0.5%, reducing the Bank's target rate from 1.5% to 1%. The decision was in line with investors' expectations, who were anticipating a cut of at least 0.5%. This rate cut sets a new all time low for the Bank of England.

Pound rallies against the euro

The pound rallied against the single currency yesterday due to a broad-based improvement in investors' appetite for perceived riskier assets on the back of stronger-than-expected service sector data across the globe. Indeed, PMI services data out of the UK rose to 42.5 in January from 40.2 the previous month, and higher than market forecasts of 40.4.

The euro's slide yesterday was accelerated after Fitch Ratings downgraded Russia's long-term foreign and local currency ratings to triple-B, sparking fears of a deep downturn in Eastern Europe. Capital outflows from Russia put pressure on the rouble, forcing Russian authorities to sell euros to maintain the balance of their euro-dollar currency basket.

The major news today will surround the interest rate decisions due from the Bank of England and European Central Bank. The market is anticipating a 0.5% cut from the BoE, whilst the ECB is expected to keep rates on hold at 2%. Any unexpected move from either central bank could lead to a weakening of the currencies.

Pound falling against the US dollar

The pound has lost ground to the US dollar this morning, as investors expect the Bank of England to cut interest rates to another record low this afternoon. Sterling has traded in a very volatile fashion this week, alternately undermined by Moody's downgrade of Barclays and buoyed by a slightly less bleak outcome than expected from a round of economic data, including British service sector numbers. Overall though, underlying nervousness at the vulnerable state of Britain's financial sector and broader economy has kept sentiment weak.

A 0.5% rate cut from the BoE has already been priced in, but some investors are speculating that the central bank may cut rates by a full percentage point to stave off a deepening recession.

US dollar strengthens against euro

The US dollar strengthened over the euro by 1.91 cents yesterday to close the day at 1.2847. A report on the health of the US manufacturing sector showed that activity had not fallen as much in January as expected, which gave the dollar some strength. Coupled with this was news that US private sector job losses had slowed slightly in January. The euro's position was also undermined by news of a downgrade in Russia's sovereign debt due to low commodity prices, dwindling reserves and corporate debt problems.

In today's trading the dollar has pushed slightly lower but the rate has steadied ahead of the ECB's interest rate announcement at 12.45 GMT this afternoon. Investors expect the central bank to keep interest rates on hold at 2% this month, with further cuts potentially made at a later date. Other announcements in the eurozone include German Factory Orders figures, whilst in the US Jobless Claims, Nonfarm Productivity and Factory Orders data is released.

New Zealand dollars weakens against the pound

The New Zealand dollar weakened against sterling yesterday, as initial optimism over proposed stimulus packages and upbeat US data was overshadowed by investor caution. Concerns over fragile financial markets and rapid deterioration in global growth continue to be the dominant factor in world markets.

Aussie dollar weakens as investors sell high yielding currencies

The Australian dollar weakened yesterday amid heavy selling of high yielding currencies as investors again turned cautious. The aussie was also weighed down by concerns that the government’s proposed stimulus package would not pass in time to meet its time table. The Federal opposition has opposed the bill and despite it passing the lower house it still needs to be passed by the senate. Sterling was also buoyed yesterday by data revealing that the deterioration in the UK service sector had slowed in January. Market focus will now shift to Europe, with the BoE and the ECB making rate decisions later today. Investors are unlikely to undertake heavy positioning ahead of this, as economists are forecasting the BoE could cut anywhere from 50 basis points to 100.