Currency Update – Thursday 8th January

Currency Update – Thursday 8th January

Sterling has continued it's rally yesterday, albeit at a slower rate, breaking above 1.10 against the Euro, and 1.50 against the Dollar, indeed it even climbed to almost 1.5150 against the Dollar overnight before falling back. Liquidity remains relatively thin for the Pound, and therefore the rate is moving around,  as traders wait for the MPC decision at midday today; a 50bp cut the most widely expected outcome, although there are calls for both a larger cut, with some even calling for the MPC to emulate the US zero interest rate strategy, and others calling for rates to remain on hold as unless lenders pass on the cuts they will have little impact. There are also rumours that the BoE are thinking of pursuing a policy of 'quantitative easing', which can either be the government buying shaky assets, thereby injecting money into the system, or simply printing more money, which is of course an inflationary policy. Although it is doubtful that the UK will suffer the same effects as other economies who have turned up the speed on the printing presses, such as Zimbabwe, and Germany in the 1930s (whose government at the time announced that the problems would be solved as they had just installed faster printing presses), if the UK government started printing money the action would still carry major negative connotations.

The Dollar has suffered, as just how weak the US economy is was shown yesterday as the ADP employment report, often seen as a precursor, although not a very reliable one, for the non-farm payrolls report, saw private employment fall by a massive 693k, and the unemployment rate could rise to 7% tomorrow. The US economy is most likely the worst performing of the major economies at the moment, but it was first into the slump, so along with the large government spending, the US economy could be the first to climb out of the recession, however the fiscal state of the US government has eroded the Dollar's safe haven status. It is hard to overstate just how bad the  US finances are, their budget deficit has doubled to above $1 trillion this year, with next year likely to be even higher, and the national debt is around $10.5 trillion, or 74% of GDP. The US may find it hard to attract foreign investment to fund these large figures, with interest rates down near 0%.

The major even of today is of course the MPC meeting at 12 o'clock, but apart from that we also get a large raft of Eurozone data, such as consumer, industrial, and service sector confidence (the ECB don't meet until next week to deliver their rate decision). The Euro has been suffering from decreasing confidence recently and today's figures are expected to be weak, which is unlikely to help. The ECB are seen to be behind the curve in reacting to the weakening picture so expected the Euro to continue to be on the back foot.

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