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The USD traded well for the most part of yesterday as the anticipated a more hawkish tone from the FOMC interest rate meeting due tomorrow night- in particular it is expected that FED will look at an exit strategy soon on measures introduced. In addition as the USD has been sold aggressively in the last 2 weeks then it was unsurprising to see some profit taking in the markets. However in later trading the USD once again turned negative as rumours surrounding the G20 escalated; the talk was that the G20 will call for gains in certain currencies to help reduce global trade imbalances. The USD was further hindered by increased risk appetite as the Asian Development bank upgraded their growth forecasts for Asia for 2009 and 2010.

The pound remained under pressure yesterday in particular against the euro hitting a 5 month low. The key level will be 1.10/0.9090 and for the moment this is holding, however we do have the risk event of the Bank of England minutes tomorrow which is expected to reiterate the negativity and dovish tone of the Bank of England. The BoE yesterday in their quarterly report said that “It is possible that sterling’s depreciation may be part of a more prolonged process of rebalancing of the UK economy, generating a fall in the long-run sustainable real exchange rate.” This statement confirms that the BoE expect a weaker pound going forward.
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The pound came under intense pressure last week falling to 1.10 against the euro and slipping against the USD. The pound has not been helped by wobbly risk sentiment, but the main damage seems to have been inflicted by an article in the Telegraph. The paper reported that Lloyds Banking Group has been forced to abandon it’s plan to withdraw from the Government’s toxic debt insurance scheme after failing to raise enough capital to meet the FSA’s strict requirements.

Among the other factors weighing on the pound; likelihood of early move by Bank Of England to cut deposit rate paid on bank reserves; likelihood of additional Quantitative Easing coming soon; and of course dire public finances. The recent rally in the FTSE will have provided the pound with some support- the concern is that if equities sell-off the pound could drop further. We need to see some consolidation over the next few trading sessions to support the pound; the better than expected public sector net borrowing data gave the pound a reprieve but we will need to see more good news to support the limp pound.
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The pound is under intense pressure this morning falling to 1.10 against the euro and slipping against the USD. The pound has not been helped by wobbly risk sentiment, but the main damage seems to have been inflicted by an article in the Telegraph. The paper reports Lloyds Banking Group has been forced to abandon it’s plan to withdraw from the Government’s toxic debt insurance scheme after failing to raise enough capital to meet the FSA’s strict requirements. As we experienced previously jitters in the UK banking sector hurt the pound and given the bad sentiment already surrounding the pound it is no surprise to see it fall on this news.

Among the other factors weighing on the pound; likelihood of early move by Bank Of England to cut deposit rate paid on bank reserves; likelihood of additional Quantitative Easing coming soon; and of course dire public finances. The recent rally in the FTSE will have provided the pound with some support- the concern is that if equities sell-off the pound could drop further. We need to see some consolidation over the next few trading sessions to support the pound; the better than expected public sector net borrowing data gave the pound a reprieve this morning and it has edged up from the lows but a dead cat does not bounce.
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The dollar continued to come under pressure across the markets as more positive feedback from global markets spurred on the sentiment that the recession is nearing the end. Yesterday from the US we saw that industrial production and CPI data came in better than expected- industrial production up 0.8% following the previous days’ positive retail sales data. This has given the markets a comfort factor and lessened chatter on a double dip recession. EUR/USD continues to drive towards 1.48 and USD/JPY is pegged at 90.80; even the pound managed to gain up against the USD.

From the UK we had retail sales data and this came in as expected- although this was slightly disappointing for sterling we have not seen any further selling on the pound. Elsewhere, BOE quarterly survey shows Britain’s inflation expectations for the coming year holding steady at 2.4% in August, unchanged from May.

In other news the Bank of Japan and the Swiss national bank both left their interest rates unchanged as expected. Japan upgraded their outlook for the economy and in recent talk they have even moved away from discussing the problem of a stronger Yen. This is an interesting change in rhetoric as a strong Yen undoubtedly impacts on the economy of Japan as an export driven economy, however a stronger Yen will help to boost domestic demand and should actually help formulate a sustainable recovery.
The key levels to look out for today are centered around further USD weakness with 90 on USD/JPY a huge level; 1.48 on EUR/USD and 1.6650 for GBP/USD. The factors that could turn this seemingly relentless selling of dollars would be a pull back in equities or hawkish comments arising from the Fed.

Yesterday sterling started on a fairly positive note after UK CPI data came in stronger than expected- this should have suggested that falling inflation was maybe not as bad as expected and that the QE measures so far introduced have started to have some effect. However later in the morning Mervyn king addressing the parliamentary committee soon gave the markets an insight into the thought of the Bank Of England and unfortunately for sterling it is still very negative. The hammer blow for the pound was the consideration that the deposit rate for reserves will be lowered- although this is not cutting the official rate it is still akin to a dovish outlook- this also leaves the door open for further QE measures. The frustration from the Bank of England is that the banks are not yet passing on the liquidity in the form of lending- the cogs are still not turning as they should be to drive the UK economy forward. Today we have seen official unemployment for the UK rising to 7.9% (the highest in 14 years) with claims for benefit growing by 24,400. Although the employment data has come in line with expectations taken with the negative comments from King the pound is on the back foot and is likely to remain so for the short term.
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We have experienced a bumpy ride so far this morning in the markets- sterling started positively touching 1.6650 against the USD and 1.1380 against the euro; EUR/USD also achieved 1.4647 in early trading. Overnight we had the RICS UK house prices show a rise for the first time in 2 years and then this morning we saw that CPI (Consumer Price Index) data from the UK came in stronger than expected at 0.4% for August. This feedback should have given the markets some assurance that inflation levels are slowly rising in line with the impetus of QE- sterling initially moved higher against the USD and the EUR. As the morning has progressed we have seen German ZEW come in weaker than expected and this has led to a slight sell off in EUR/USD back under 1.46.

However later in the morning Mervyn King swung the markets and sterling into a negative tone. Despite stronger than expected CPI report BOE Governor King feels risks to inflation to the downside. Sterling is sold off across the board after BoE King says may reduce the interest rate on bank reserves and highlights the long slow road ahead. Sterling has lost over a cent against the USD and is testing the 1.13 level against the euro.
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