After criticising the UK government for increasing public borrowing to fund UK rescue plans, the German government, which itself already has more public borrowing than the UK, has now announced it's own government spending plans, concentrating on travel and education infrastructure. It seems that maybe the German government have realised just how sharp the Eurozone recession may be, and the hope is that the ECB have also had an epiphany and will cut rates by the 50bp that the markets are pricing in. If the ECB keep to their previous cautious strategy and cut rates by less than 50bp, or indeed give a less dovish press conference than many expect, the Euro could weaken at the end of the week.
The Euro has already been weakening, dropping below 1.33 against the Dollar, however the Pound has weakened further, as profit taking from last weeks strong rise has forced Sterling back towards 1.1050 against the Euro. The Pound has actually fallen much further against other currencies falling back below 1.47 against the Dollar, a fall of over 6c since Friday, and the Pound has also fallen heavily against the Yen, over 4% to under 1.31. The Japanese currency has been boosted by another fall in global market expectations, which has also weakened the Australian Dollar sending it down below 0.67 against the Dollar, from a high above 0.72 at the start of the year.The UK had it's own bad news as the British Retail Consortium released figures showing the worst Christmas recorded with like-for-like sales -3.3% and total sales -1.4% in December.
Today we have trade balance figures for both the UK and the US, both are expected to narrow, in the UK due to the fall or Sterling, which should make imports more expensive and exports cheaper, and in the US due to the fall in the price of oil. The UK balance may not decrease due to the delayed effect of the currency fall, which will push up the value of imports, before the order book on exports has time to expand. We also have the DCLG measure of house prices, which tends to lag behind other indicators, so therefore, although it may reiterate the fall over the last few months of 2008, it is not going to give us any information we didn't already have.
The Pound is likely to stay on the backfoot as profit taking has eroded some of last week's gains, but without any new data to shake the Pound it is likely to hover around current levels until the ECB take centre stage on Thursday.
Michael Corcoran - Assistant Manager | Treasury Solutions