Sterling erases some of its gains against the euro

Sterling erased some of the Wednesday’s gains yesterday following a raft of weak economic data released around the world. It was confirmed that the Chinese economy is slowing at its fastest pace on record as the world’s third largest economy is being hit hard by falling consumption, and there was a sharp fall in US housing starts. Negative news being released from such major economies weighed on the pound, despite David Miles – who is replacing David Blanchflower on the MPC in June – suggesting that the worst of the recession may be behind the UK, with there being tentative signs that the Bank of England’s quantitative easing plan may be working. The FTSE 100 also enjoyed a good day, breaking through the 4,000 barrier as it was lifted by banks, following JPMorgan’s first quarter results. Energy stocks also rose following firmer crude oil prices, with a barrel of crude oil trading at around the $53 mark this morning.

However, sterling’s losses were pared as it was confirmed that eurozone industrial output plummeted by a record 18.4% year on year in February, and inflation halved to an all time low in March, underlining the depth of the recession and putting more pressure on the European Central Bank for more monetary easing. Overnight we have also had comments in Tokyo from Jean-Claude Trichet, who stated that the European Central Bank must do everything to restore corporate confidence, with more rate cuts on the cards.

First tier economic data is light on the ground today in both the UK and the eurozone. We do not expect any large moves in GBP/EUR today as sterling’s recent rally looks to cool, with traders taking profits and wary of taking on too much risk ahead of the weekend.

Sterling weakens against the US dollar

The pound weakened against the US dollar by 0.88 cents yesterday, to close at 1.4839 after largely weak economic data saw sentiment weaken as investor’s hopes of an economic recovery were dampened. News that JP Morgan had reported better than expected quarterly profits in the US saw confidence in the global banking system improve, and led to the FTSE 100 making gains of 2.13% by the close of the markets. In fact, the pound’s weakness was largely technical as its inability to post substantial gains above the 1.50 level led investors to take profits. In the US the rate at which housing starts and building permits were falling eased, which pointed to an easing of recessionary pressure on the US housing sector. It was also announced that the number of newly unemployed Americans applying for benefits fell to 610,000, although the number of continuing unemployed on benefits rose to 6.022 million.

In today’s trading the pound has continued to slide ahead of the announcement of the Reuters/Michigan Consumer Sentiment Index in the US as well as a speech from Federal Reserve Chairman Ben Bernanke. There are no major economic announcements in the UK today.

Euro falls to fresh multi-week low against the US dollar

The euro fell to a new multi-week low against the US dollar this morning on speculation that the ECB will cut interest rates further at their next meeting. Speaking at a conference in Tokyo overnight, European Central Bank President Jean-Claude Trichet emphasized the need for price stability. Trichet indicated that it is likely there will be a quarter point interest rate cut, while ECB Governing Council member Axel Weber stated that interest rates should not fall under 1%, and if they do inter-bank lending will be adversely affected. Additionally, there were indications that there may be announcements of quantitative easing measures.

In the US, Federal Reserve Bank of Dallas President Richard W. Fisher spoke at Tsinghua University in Beijing, China to address the global impact of the United State's response to the financial crisis. His view was grim, stating that the "American economy (is) in stasis." Fisher also predicted that unemployment in the US will reach at least 10% by the end of 2009.

In the eurozone Trade Balance figures are due to be released this morning. In the US, the Fed’s Bernanke will be making a speech at 17.45 BST.

New Zealand dollar undermined by raft of weak data

The New Zealand dollar weakened yesterday after a raft of weak economic data dented hopes of an imminent recovery in the global economy. There had been sporadic data over the last few weeks which had investors speculating that the world economy is starting to bottom out. But last night’s data, including a poor Chinese GDP figure, suggested there is still some way to go. This caused investors to revert back to safe havens.

Australian dollar weighed down by disappointing Chinese growth

The Australian dollar remained slightly weaker against sterling yesterday, after a disappointing Chinese Growth report continued to weigh on market sentiment. Data revealed the Chinese economy grew by 6.1 percent in the fourth quarter, just under the forecast figure. However, there had been market speculation that the figure could have been as high as 8 percent, so the smaller figure disappointed markets. Australia is a large exporter of commodities and relies heavily on Chinese demand. The data also did nothing to reassure tentative investors that the global economy is starting to bottom out. The aussie as a high yielder will be one of the worst affected if risk aversion increases.