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.

Euro weakens against the dollar as equity markets fall

The euro finished down against the dollar yesterday, losing 0.94 cents on the day as concerns about the US stimulus package caused stock markets to plummet, which in turn undermined the euro and supported the dollar. A "stress test" for the largest US financial institutions included in the plan sparked a slump in the banking sector, as investors worried about which banks are strong enough financially to make the grade.

All banks with more than $100 billion in assets will be required to submit to the stress test. That level encompasses such institutions as J.P. Morgan Chase, Citigroup, Bank of America and Wells Fargo; shares of those banks dropped by between 10% and 19% following the announcement. Some other banks that will likely face the test fell even more steeply - shares of SunTrust Banks, which has more than $150 billion in assets, slumped 27%, while Regions Financial with more than $140 billion, lost 30.

The euro has recovered a little lost ground this morning following the release of German CPI data, which showed annual inflation had slowed to 0.9% in January from 1.1% in December, as expected. However, the euro is still trading below the $1.30 level as risk aversion continues to support the dollar.

Dollar strengthens against the pound

The dollar strengthened against the pound yesterday in anticipation of Senate approval of the US bailout plan. Traders gave a tepid response to the Senate finally approving the delayed stimulus bill, as concerns arose that the bill would not be sufficient to revive the US economy. The dollar strengthened rapidly against the pound as risk aversion returned.

Data released in the UK was mixed as a BRC report showed fairly positive retail sales whilst a housing report showed falling home sales.

There are several significant announcements taking place in the US today including Trade Balance at 13.30 GMT. In the UK, the ILO Uenemployment Rate at 09.30 GMT will be of particular significance.

Sterling reverses gains against the euro

The pound reversed many of the gains seen over the past week against the euro yesterday, as markets snubbed the new US bailout plan. Global equity markets fell after the plan was announced, over fears that the rescue plan is too vague and may not go far enough to rejuvenate the world’s largest economy. Investors favoured safe haven currencies such as the dollar and the yen, and dumped the relatively higher risk pound as risk aversion took hold. Indeed, sterling could not be saved by better than expected trade balance figures released in the morning, which showed that the UK’s trade gap narrowed to levels not seen since June 2007.

There are no major announcements due in the eurozone today, whilst investors will take a keen look at the Bank of England’s quarterly inflation report and unemployment figures released this morning.

Australian dollar slightly weaker against sterling

The Australian dollar was slightly weaker against the pound yesterday, after investors were uninspired by the announcement of the US bank rescue package. This caused a downturn in stock markets, triggering an upturn in risk aversion. Economic data was mixed out of the UK as the pace of falls in house prices quickened, while retail figures were better than expected and Britain's trade deficit narrowed. Later today investors will focus on key UK unemployment data and the BoE quarterly inflation report. The bank report on inflation may give further clues as to the size and timing of future rate cuts. Markets are expecting inflation levels to undershoot the target levels, paving the way for further rate cuts.

Kiwi dollar may remain vulnerable

The New Zealand dollar remained in relatively narrow ranges yesterday as investors digest the US bank rescue package. The kiwi may remain vulnerable as many in the market are of the view that the rescue plan is only a band aid solution and will not help solve the banking crisis. Continuing concerns over global financial markets is likely to see investors remain relatively risk averse. Until retail sales figures are released on Friday the kiwi’s direction will continue to be driven by broader market movements.