Pound falls against the euro

The pound slumped against the single currency yesterday, after the Bank of England said it was ready to ease monetary policy further and was willing to take unconventional measures to revive the ailing economy – quantitative easing here we come. Mervyn King stated that once approval has been given, the Bank of England would create cash to buy government and corporate bonds in a bid to boost the wider economy and ease credit conditions. It was also stated that the bank is anticipating the economy will contract all year, hitting a low of minus 4% in the second quarter.

News out of the eurozone was little better as the Spanish government admitted that it may be forced to bailout some of the country’s banks – something they have refused to do up until now.

Investors will take note of the European Central Bank’s monthly report due this morning, along with industrial production figures. There are no major announcements due in the UK today.

Pound weaker against the dollar

The dollar began to strengthen against most major currencies yesterday due to uncertainty arising over the US government’s bailout plan. Additionally, the UK released a report showing that unemployment had hit a 10 year high. However, the dollar later reduced gains against the pound after Congress reached a deal on the stimulus package.

The Bank of England released a report predicting that inflation would be 0.5% in 2 years and stated that further easing in monetary policy might be needed in the near future.

There are several significant announcements taking place in the US today, including MBA Mortgage Applications, Jobless Claims and Retail Sales.

Dollar little changed against the euro

The US dollar finished little changed against the euro yesterday, amid signs the US Senate and House of Representatives will be able to bridge their differences over the economic stimulus plan. Congress and the Obama administration reached a deal on Wednesday on a $789 billion package that would mix tax cuts and new government spending in an effort to rescue the faltering US economy. Votes on the final stimulus bill could come as early as Thursday.

Wall Street stocks rose on the news late in the New York session amid rising risk appetite, reducing some demand for the dollar as a safe-haven currency. Prior to the announcement, the dollar had been trading higher as investors had sought its safety amid market volatility.

In the US today Retail Sales and jobless claims data are due this afternoon, while industrial production figures are released in the eurozone this morning.

Speculation about quantitative easing undermines the pound against the aussie

The Australian dollar gained back most of its recent days losses against sterling yesterday, after BoE Governor Mervyn King stated that the central bank was ready to ease interest rates further as well as being willing to take unconventional measures to help revive the British economy. He also mentioned the bank would discuss 'quantitative easing', which is essentially buying assets to boost the money supply. Earlier the bank inflation report showed inflation forecasts had been revised down sharply. Despite the likelihood of further rate cuts the BoE now has very little to play with in terms of reducing rates, which has had the market speculating that the use of non-conventional methods is now much more likely. Quantitative easing is likely to help resolve some of the key issues in the market, however it is likely to have a strong negative impact on the pound.

Kiwi dollar supported by rising equity markets

The New Zealand dollar strengthened against sterling yesterday, as gains in equity markets saw a greater demand for high yielding currencies. With little out domestically the kiwi’s direction has been largely driven by equity markets, which are used as a barometer for risk. The announcement of a consensus over the US stimulus package has generated cautious optimism from most markets.