Euro interest rates held at 1pc by ECB

As expected the ECB kept homes loans rates on hold at 1%. 

They announced that it will continue to scale back their special lending measures as expected and equally as expected Trichet dodged the difficult bullets concerning Greece and gave little away. 

Yesterday's Greek bond issue was a real success and this gave the markets a boost backing up the recent austerity measures introduced- the market is aware that we are not out of the woods but this certainly helps. 

Expect further wranglings with Greece but nice to get some good news for a change; today the German and Greek heads are meeting. 

Should be a spicy meeting after yesterdays comment from the German Economics Minister who said that the German government has no intention of offering Greece "even one cent" and that each country has to take care of its own affairs…..would be nice to be a fly on the wall for this meeting.

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Sterling holds steady for now

Not much movement overall by Sterling as the markets paused on selling the Pound. 

This morning we have in fact made some gains back and as we stand we are holding just above the key 1.10 level and 1.50 on GB Pound/US Dollar The 1.50 level on GBP/USD is a crucial level to hold above and will help to steady the ship and prevent further selling pressure. 

This morning we have seen UK PMI data come in much stronger than expected rising to 58.40 compared to the 55 expected and giving the best reading for over 3 years. 

On top of this consumer confidence rose to 80 and a 2 year high as consumers look ahead to a brighter 2010 for the UK economy. The good data this morning was a huge breath of fresh air for sterling giving it a welcome break from the selling momentum.

EUR/USD has picked up this morning beyond 1.36 following the leaked news of an austerity package for Greece totalling 4.8 billion euros. 

There is still uncertainty on the level of support that Greece will receive from the EU and the Greek PM tactically said that the cabinet may turn to the IMF if the EU does not give support. Nice move. If we get further clarity on the level of EU support then this should lift the euro further. 

In addition it will help lead to selling pressure on USD and the JPY and hopefully boost the Pound as confidence improves.

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Eu bullies Greece over finances and raises sovereignty question

The European Union has bullied Greece by stripping it's vote at a crucial meeting next month, the worst punishment ever suffered by an EU member state.

The council of EU finance ministers said Athens must comply with austerity demands by March 16 or lose control over its own tax and spend policies altogether. 

It if fails to do so, the EU will itself impose cuts under the draconian Article 126.9 of the Lisbon Treaty which would amount to economic sovereignty.

While the symbolic move to suspend Greece of its voting rights at one meeting makes no practical difference, it marks a constitutional watershed and represents a crushing loss of sovereignty.

Some German officials have called for Greece to be denied a vote in all EU matter until it emerges from "receivership".

The EU has still refused to reveal details of how it might help Greece raise €30bn (£26bn) from global debt markets by the end of June. Investors are unsure whether this is part of Kabuki play of "constructive ambiguity" to pressure Greece and keep markets guessing, or reflects the deep reluctance by Germany to be drawn deeper in an EU fiscal union. 

Greek bonds sold off as ten-year yields jumped to 6.42pc, but the euro rallied to $1.3765 against the dollar as broader issues resurfaced in currency markets.

Jean-Claude Juncker, head of the Eurogroup, hinted that ministers have already agreed on a support mechanism, should it be necessary. It will most likely involve by bilateral aid by eurozone states. He said proposals for an IMF bailout - backed by Britain - were "absurd" and would shatter the credibility of monetary union.

Many Germans disagree, including Otmar Issing, once the backbone of the European Central Bank. He said an EU rescue for Greece would be fatal, arguing that unflinching rigour is the only way to hold monetary union together without political union.

Tuesday's EU verdict amounted to a thumbs down on Greece's earlier austerity efforts, viewed as too reliant on one-off measures and too light on spending cuts. 

Greece must reduce its deficit from 12.7pc of GDP to 3pc in three years. Greek customs officials expressed their anger by kicking off a three-day strike, the first of many stoppages set to culminate in a general strike next week.

However, premier George Papandreou has won support from key political parties and a majority of the people.

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Sterling rides the currency markets rollercoaster

The good start for Sterling soon lost momentum following the Bank of England's inflation report and Mervyn King's press conference. 

The markets and sterling were initially boosted following a report in Le Monde newspaper of a Germany led aid plan for Greece. The ECB did not comment on these reports but the rumour alone was enough to drive the markets higher with the USD shedding some of its recent gains along with the Yen- GBP/USD pushed through 1.5750 and GBP/EUR 1.1425. 

However the markets made a quick U-turn as party pooper Mervyn King dampened the mood with a dose of reality- the key blow was the affirmation that it is far too early to conclude that no more QE needed.

This forced GBP/USD back to 1.5650 and GBP/EUR to 1.1350. Expect the "will they or wont they" that is the ECB assisting Greece to dominate the markets over the coming sessions.

In economic data from the UK earlier December Industrial production output came in stronger than expected at +0.5%. Good news for the UK economy but not significant enough to lift sterling. 

Sterling is suffering at the moment as it is being sold on the fear factor. Later today we have Bernanke’s testimony to the congressional committee- this could lead to some US dollar volatility.

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Euro bashing rests for porfit taking

However the pause in its recent decline is more to do with profit taking than a reversal of the currency’s fortunes. 

Today's Financial Times suggests that £7 billion of short trades are weighing against the eurozone's immediate currency prospects.


We did see both Euro and Sterling hit 8 month lows overnight as the Asian markets rushed to buy the perceived safe haven US Dollar but once again, proximity to support levels was enough to bounce both rates as Europe entered the fray. 

The concern for Euro bulls is that recovery attempts seem very limited in scope and small in magnitude. 

The rally for the single currency in the US last night was snuffed out by the combination of a late sell off in equities and an expectation that Bernanke’s testimony this evening could very well signal a more hawkish Federal Reserve outlook, with speculation that he might lay groundwork for a tightening of monetary policy.

Yesterday’s markets, outside the late US fluctuations, were largely extremely boring with traders waiting for developments (either good or bad) on the Eurozone Sovereign issue. 

Nothing much happened. The Spanish Finance minister was in London talking to bond holders and the Portuguese and Greek governments were both vocal in their defence of their respective fiscal positions Data again is light today with UK trades and US wholesale inventories the highlights. 

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Quantitative Easing QE- are we done?

Today the markets are be focused upon the interest rate decisions from the Bank Of England and the European Central Banks. 

First up is the BoE- the markets will be waiting to see what the MPC do with QE- the UK asset purchase scheme. Will they hold firm at the current level of £200 billion? Will they expand by a further £25 billion? Or will they signal the completion of the asset purchase- or at least pause? 

There are valid arguments for all scenarios, however I feel that the most likely scenario is that the Bank will not extend now but leave the door open for future extension if deemed necessary. For sterling any signal on further extension would be negative and any closure or pause should be positive.

For the ECB the statement after the meeting will be all important and the situation in Greece, Spain and Portugal will be scrutinized. Trichet usually dances through tough questions without giving too much away so we are not likely to get any major surprises here. 

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Greece denies a bail out is required

Greece's Prime Minister George Papandreou has denied speculation that it will have to be bailed out by the European Union.

Reports have suggested that the EU will pump money to help Greece whose public finances are in ruins.
At the World Economic Forum in Davos, he also said countries like his "are being used as the weak link, if you like, of the eurozone."
European leaders also denied that Greece would be kicked out of the euro.
"Nobody's going to be leaving the euro," Spain's Prime Minister Jose Luis Rodriguez Zapatero said.
"On the contrary, countries will be joining the euro in the future. The same is true for the EU. That is the best proof on how the EU has helped to guarantee stability."
A report in Le Monde suggested that the EU was considering bailing out Greece because the Hellenic nation's woes had shaken the euro.
'Speculation'
European Central Bank President Jean-Claude Trichet said the pact had helped keep the 16 members of the eurozone from experiencing even more strain.
Mr Papandreou said that there had been a lot of "speculation" during the financial crisis and that people were against the euro had targeted countries like his in the bloc.
Greece's public debt stands at about 300bn euros ($419bn, £259bn).
He also denied a Financial Times report that said Greece had been asking China to buy up to 25bn euros of its debt to help secure its finances.
But Mr Papandreou refused to blame the EU for the country's troubles.
"We Greeks see it as our problem to put our house in order," he said. "Greece blames itself, not the EU."
Mr Papandreou also floated the idea of having EU government bonds for all the members in the bloc.
The crisis is seen as the first test since the euro was created in 1999.
Greece, Spain, Portugal, Ireland and especially Italy together account for 40% of the eurozone's debt.
Their debt has ballooned as their countries have been battered by the financial crisis, while larger economies have had to spend huge amounts to bail out their key industries.
Since the financial crisis last year, many countries - including the UK, France and Germany - have risen above the EU's limits on public spending as a proportion of growth.
The EU's Stability and Growth Pact states that no nation in the bloc should have an annual budget deficit higher than 3% of its gross domestic product.
Greece aims to shrink public debt to 9.1% of overall economic output this year, down from 12.7% last year.

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Greeks bonds tragedy in the making

The “Greek tragedy” continues with rumours swirling that the Greeks  have approached China looking to offload €25 billion of their debt. 

The European dream is starting to crumble when on the back of the warning from the ECB that the Greeks will have to sort out their own finances they look instead to the East for a solution.

The euro has again tumbled on the back of this and €1.40 is now the line in the sand. The spread of the 10-year Greek bond yield over benchmark German Bunds also hit a high not seen since Greece adopted the euro in 2001

The US Dollar moved higher yesterday evening after the Fed's monetary policy meeting ended. 

As expected, the central bank left interest rates on hold at the historically low range of 0 – 0.25%, and has been worded in previous statements indicated that it will continue to do so for an “extended period". 

However, it was noted that one member of the committee, Thomas Hoening, voted to eliminate the extended period phrase. It also confirmed the continued plan to unwind its support to financial and credit markets. 

Also of note was its presentation of a brighter economic outlook for the economy than highlighted in its previous statement in December.

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Euro plunges to 1.40 against US Dollar

It is fair to say that the euro has been well and truly hammered over the last few trading days and is on the ropes. 

The 1.40 level on EUR/USD is today in sight which is a 7% fall from the December highs. 

The demise of the euro was triggered with the economic Greek tragedy and has since been hit with a return to risk aversion which is triggering buying of USD and JPY. 

Concerns are increasing on the maintainability of the ever expanding growth in China and fears that China will act further to slow the rampant growth by raising rates. 

This has taken a lot of risk off the table in the Far East and Australasia and we have seen weakening of the commodity currencies to tie in with this- in particular the Aussie dollar. 

GBP/EUR is hovering around the 1.15 level- a further fall in EUR/USD would lead it cleanly through the 1.15 level. The euro will not be helped by slightly weaker than expected Eurozone PMI this morning.

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Sterling strengthens to 1.15 against the euro

Sterling is continuing its rally against the weak euro but has fallen back against other major currencies. 

GBP/EUR is pushing up and has already hit the key 1.15 level in trading today as the euro is pummeled against the major currencies. The move higher for sterling is more related to euro weakness this morning as risk aversion is back in play on further concerns surrounding Greece. 

The failing on the sterling Bull Run against the USD was fuelled by renewed concerns raised by Fitch the credit rating agency on the UK’s fiscal deficit coupled with a blunt warning from Mervyn King on the health of the UK economy. 

Alistair Darling again repeated the need to cut the deficit but the rating agencies are focusing on changes introduced and not to be introduced- the general feeling is that the pre-budget has not gone far enough.

Focusing on UK data we have seen jobless claims come in better than expected and the official unemployment rate has fallen to 7.8% from 7.9%- very good news. 

No surprises from the BoE in their minutes as the MPC voted to keep rates and QE on hold with a 9-0 decision. They also indicated that yesterdays surge in CPI is most likely a blip and CPI levels should wind lower in 2010 and the February inflation report will offer more clues on the real status of inflation. 

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Sterling continues to stride ahead in 2010

Another bright start for Sterling which continues it's gains. 

Sterling hit a 6 month high against the euro and pushed higher against the USD. The move was initiated with the acceptance and recommendation from the board of Cadbury’s on the offer by Kraft. 

The Kraft offer values each Cadbury’s share at 840p and shareholders will be entitled to receive 10p per share in the form of a special dividend. Sterling gained on the back of the expected benefits from the M&A flows of the deal. 

Then at 9:30 official UK inflation data came in much better than expected- UK December CPI has come in at +0.6% month on month, +2.9% year on year, demonstrably stronger than median forecasts of +0.3%, +2.6% respectively. 

This has raised the prospects for a Bank of England interest rate rise in 2010 and it certainly offers the Bank of England something to think about in early Feb.

This data also heightens the view on the UK employment data later this week- better data here could reinforce the view that the UK is firmly on the road to recovery. 

The Pound hit a high of 1.1455 against the euro and 1.6457 against the USD before falling back from the highs- Mervyn King is due to speak later and the market will expect a cautious approach which could take the edge off sterling- we will see later..

The Euro is under pressure this morning as the fallout in Greece continues to undermine the single currency and in addition the German ZEW came in weaker than expected for the third month in a row. The euro is closing in on key technical levels against the USD and the EUR with EUR/USD close to breaking below 1.4275 and GBP/EUR targeting 1.15. 

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China and Eurozone centres of markets attention

China are scheduled to release their 4th Quarter GDP figure with market consensus looking for reported growth of 10.5%. 

The odds however are for an even stronger outcome and markets could react very positively towards the regions currencies and commodity currencies against those of the industrialised West. 

In The Land of the Rising Sun, this week should see further developments in the winding up of Japan Airlines. Reliable rumour has it that the company’s commercial activities, including their oil and fuel contract will be 100% guaranteed but that their forex hedges will be required to be unwound. This could mean the company needing to sell US Dollars against the Yen.

As expected last week, there was no change to the ECB’s policy interest rate and Trichet’s post-announcement was largely uneventful. 

Although he managed to achieve a balanced tone to his testimony, it was apparent that he was not overly concerned on imminent inflationary pressures within the zone. 

He acknowledged that current fiscal problems are placing a considerable burden on monetary policy but that individual States’ current difficulties would not cause the ECB to require a change in the collateral framework of any country.

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Euro rumours the centre of attention

Following yesterday’s potential minefield that was the ECB meeting, the market mover today was a rumour that went round the Far East in the early hours that the German Chancellor, Merkel, was ready to resign her position. 

This appears to stem from a report in Time magazine that was negative on the support that Frau Merkel is currently receiving. This rumour was swiftly denied by a German Government spokesperson but the damage was done and the Euro dropped sharply all round. 

In fact the move was then compounded as traders re-visited the comments from Trichet in his post-ECB policy meeting press conference.

Although he had said, when grilled by the reporters about Greece’s debt problems and the possibility of the country dropping out of the Euro, that he did not comment on ridiculous hypotheses, the whole question of Eurozone sovereign risk and the support that namely Greece, Portugal and Spain currently enjoy, was brought back to the table.

Sterling enjoyed a good spell and with the 200-day moving average at around 0.8850 being breached, traders saw a raft of stops taken out and a quick dip down to the 0.8825 Euro technical support. 

A weekly close beneath 0.8825-30 suggests a move lower towards 0.8500 but I feel that this is a move too far. The whole Greek/Portuguese situation has been overdone and it would not surprise to see traders looking at current rates as an opportune level at which to re-establish Euro long positions.

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US Greenback ends the year on a high

As we enter the last full trading day of the year, the Greenback has strengthened and trades below 1.59. 

Yesterday's US consumer confidence showed a figure of 52.90 against an expected 53.0, but still up on November's figure of 50.6. On the back of this data the dollar moved over 1.60 but shifted back towards 1.59 levels soon after as thin market trading continued.
 

German consumer price index figures released yesterday afternoon added support to the euro as we saw an increase to 0.8% from an expected 0.7%, up on last years 0.3% and euro/GB Pound fell below 1.11 where it is trading this morning.   

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Thin market trading after Christmas reopening

The markets have today reopened after the Christmas break with little to report. 

The Euro/US Dollar is attempting to push back up over 1.44 and sustain this level, with cable struggling to hold above 1.60. USD/CAD has hit a 2 month low of  1.0373. 

 European data released this morning showed that French Gross domestic product remained at 0.3% (QoQ), as a result the euro did not budge.
 

Throughout the trading day so far the euro has remained pretty strong, helped by a slightly better than expected figure for Italian business confidence. The Pound has gained ever so slightly against the greenback. 

This afternoon we have US consumer confidence which is expected to show a figure of 53, against a previous figure of 49.50   

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The US Dollar rally continues

The US Dollar index- which measures the strength of the USD against a basket of currencies hit a 3 month high as the Dollar extended its recent rally. 

However the motivation for the rally shifted- previously the US Dollar gained on the back of recent positive economic data in the form of retail sales and payroll numbers. 

Yesterday it was more a case of good old fashioned risk aversion creating a demand for the safe haven US Dollar. A more upbeat statement from the FED may also have helped as they slowly turn more hawkish, however it was a clear case of risk off that drove the US dollar higher yesterday. 

The problem is that a weaker Dollar will have contributed to better economic data and now the USD is gaining we could see future economic feedback stuttering.

Looking at current levels EUR/USD has now fell back to 1.4380 and hit a low of 1.4304 a level not seen since September. The euro is still struggling on structural weaknesses within certain nations in the 16 nation zone. 

GB Pound/US Dollar also fell into 1.60 territory before creeping back to 1.62- a fall in BRC retail sales was not good news for the UK economy and this number on release caught the market off guard with sterling dropping sharply.

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Euro weakness continues

Since the beginning of December the euro has shed 500 points against the US Dollar.

Recent problems in Greece and Austria and further structural problems within the eurozone are zapping confidence. In a nutshell along with recent problems within Greece and Austria, you also have concern over Italy, Spain and Portugal and exposure in Eastern Europe.

Take this alongside a strong euro and expanding deficits and you have forward looking issues which are shaking investor confidence. To add to the woes of the euro, the USD has had a fine run in the last week being largely supported by stronger economic data.

Tonight we have the US interest rate meeting from the FOMC and based upon the recent turn of fortunes for the USD the market will be looking for a hawkish statement. The key levels should a more positive statement occur would be 90 on USD/JPY and 1.45 on EUR/USD for the USD to break through.

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Euro even weaker than Sterling

The euro has again moved lower against the majors and in particular against the US Dollar moving down to 1.4523 overnight and overall down 500 points from recent highs. 

The cause of the downturn has been attributed to the recent jitters in Greece and more recently in Austria. 

The Greek prime minister commented yesterday that Greece does not have much time and must take tough decisions within the next three months- decisions that have been left for decades.  

In a very direct address he stated that “we must change or sink” and vowed that he will tax the bonuses of Greek bankers by 90%- move over Alistair Darling!

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US Dollar slips again

The move back into the US Dollar did not last too long as was mainly attributed to the fear factor surrounding Dubai. 

As the markets started to feel more comfortable the US Dollar fell pretty much across the board. EUR/USD again pushed through 1.5050 and then through the 1.51 level, GBP/USD also gained back to the 1.66 level. 

Apparently unnamed sources from the ECB are saying that ECB officials are not concerned about the recent euro strength against the USD- not sure I believe that. This week we have the ECB and the improvement in economic data recently has caused speculation that the ECB will turn more Hawkish in their approach to monetary policy. 

The problem with this is that it would lead to further euro strength if the ECB move before the US Fed and this will certainly be an issue on the agenda for the ECB going into today’s interest rate meeting.

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UK inflation falls less than expected to 2.2%

UK inflation fell by much less than expected in May, lengthening the odds of full blown deflation, official figures revealed today.

The consumer prices index (CPI) measure of inflation, the Bank of England's target measure, dropped to 2.2 per cent from 2.3 per cent. Analysts had expected a fall to 1.9 per cent. This is the 20th consecutive month it has been above the Bank's 2 per cent target.

The alternative retail prices index (RPI) inflation measure, which includes housing costs and upon which many pay deals are based, has already plunged into deflationary territory. But it delivered another surprise, edging up from -1.2 to -1.1 per cent last month on the back of rising mortgage rates, confounding economists' expectations of a further drop to -1.5 per cent.

In another sign that prices are rising, core inflation, which strips out volatile energy and food costs, also rose from 1.5 per cent to 1.6 per cent.

The increased price of cigarettes and alcohol, which rose as part of April's budget, helped to push inflation upwards, the Office for National Statistics said, but significant increases came from the rising cost of DVDs, televisions, clothing and footwear- indicating that sterling's weakness is filtering through as foreign made goods become more expensive.

However, policymakers and analysts still expect inflation to fall sharply over the coming months.

Sterling jumped by 0.6 per cent against the dollar to $1.6414 after the figures were released, and rose to the highest level this year against the euro, which fell to 84.44 pence against the pound.

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IMF forecasts recovery despite Eurozone GDP fall

The head of the International Monetary Fund (IMF) said today that he expects the global economy to recover in the first half of next year despite worse than expected figures from the eurozone economy showing that GDP shrank by 2.5 per cent during the first quarter.

The quarterly fall in GDP in the eurozone– a key measure of economic health – takes the annual decline to a record of 4.6 per cent across the 16 countries that use the euro.

Germany revealed the worst fall in GDP, shrinking 3.8 per cent over three months in its worst performance since reunification in 1990. Economists had forecast German GDP would contract by 3 per cent.

However, the IMF's Dominique Strauss-Kahn said that green shoots of revival are everywhere but he stressed that banks’ balance sheets must be cleansed before an economic recovery can take place.

While today’s figures are far worse than expected, economists said the quarter would prove to be a low point, with the slowdown set to ease in the coming months.

France, Europe’s second-biggest economy, reported that GDP shrank by 1.2 per cent on the quarter while Italy, the next biggest, fell 2.4 per cent.

Much of Germany’s contraction was due to a sharp decline in exports, which make up a large proportion of the country’s economy, and a drop off in investment. The dramatic plunge in output was the fourth quarter in a row that Germany’s economy has shrunk.

Moreover, officials said fourth quarter GDP, which was previously the worst on record, was revised down to a contraction of 2.2 per cent, compared with the previously reported decline of 2.1 per cent.

Germany is now expecting a 6 per cent contraction this year and is predicting growth of just 0.5 per cent in 2010.

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European Central Bank falls into line and embraces quantitative easing

ECB falls into line and embraces quantitative easing by following the policy first adopted by the Bank of England and America's Federal Reserve.

The European Central Bank has cut interest rates a quarter point to a record low of 1pc and embraced quantitative easing (QE) for the first time, catching markets off guard with plans to buy €60bn (£53.5bn) of covered bonds.

The hotly-disputed move to purchase assets brings the ECB into line with the central banks of the US, Britain, Japan, among others, that have begun "printing" money to stave off debt deflation.

The step-change in policy follows an open clash within the ECB's governing council over its handling of Europe's worst slump since World War Two, pitting national governors from southern Europe and Ireland against the ECB's German-led hawks. Bundesbank chief Axel Weber has fought a rearguard battle to head off QE, calling it an "undesirable option" that risked inflation later.

The majority also overruled his insistence on a 1pc "floor" for interest rates. Jean-Claude Trichet, the ECB's president, said the bank had not ruled out further cuts, "depending on future circumstances".

The refusal to accept Frankfurt's lead is a turning-point for ECB, which inherited its authority a decade ago from the Bundesbank. The upsets touches on a raw nerve in Germany where critics have always suspected that EMU would turn "soft". It may set off a political backlash.

The ECB also extended its liquidity scheme from 6 to 12 months and opened its window to the European Investment Bank, giving it a new crisis role.

David Marsh, author of The Euro - The Politics of the New Global Currency, said the ECB is loath to follow Anglo-Saxon banks in purchasing government bonds because this would give most help to big debtors such as Greece and Italy. "They don't want to be seen as bail-out merchants by acting as a bond purchaser of last resort for hard-pressed nations," he said.

The IMF says Europe's banks have written down just 17pc of likely losses, compared to half for US banks. They may need $500bn in fresh capital. "If the IMF is correct, the risk of a credit crunch is bigger than the ECB likes to admit," said Mr Annunziata.

The European Commission has slashed its eurozone forecast to minus 4pc and highlighted the danger off a more vicious downward spiral if "adverse non-linearities" take hold. "One cannot exclude the risk of social and political unrest," it said.

The ECB's policy shift is a vindication for Cypriot governor Athanasios Orphanides, a 17-year veteran of the US Fed, who has battled tenaciously for bold action.

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Wise Money radar set on Thursdays ECB rate decision

The European Central Bank (ECB) surprised the markets by only cutting interest rates by 25 basis points to 1.25% last month.

A record low but when compared against the UK interest rates of 0.5% and against the US of 0-0.25% then comparatively still high in the current global climate.

The markets wanted to see more aggressive action amid rising unemployment and shrinking growth and all eyes will turn to the next ECB rate decision on Thursday. It is expected that another 25 basis point cut to 1% will materialize and the ECB may engage in additional "non conventional" measures- basically some form of Quantitative Easing to help the economy.

Stateside, the Fed plans to deliver results of stress tests on US banks to executives today that may show about 10 firms need additional capital to weather a deeper recession. An obvious way for banks to fill their capital requirements is via conversion of preference shares to common shares.

Last week, the Fed delayed the release of the tests that were originally scheduled for yesterday, as banks challenged some of the conclusions. 19 banks have been stress tested. Citigroup and Bank of America were allegedly among the banks found to need additional capital. It is rumoured that both firms disputed the Fed's determination.

Yesterday Citi rose 7.7% and Bank of America 19% after denying it was working of a plan to raise $10bn. I would be surprised if we didn't hear more soundbites about the stress tests. The results are likely to be made public later this week.

GB Pound is performing well testing the 1.50 level against the USD. The last time we were at this level was in mid April. A break above this level opens up the 1.52 level where we saw resistance in early January. GBPEUR has rallied and is currently trading at 1.1270 level, still off the 1.1381 high seen in mid April.

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Pendulum again swings towards risk appetite

Yesterday and overnight we have experienced a broad sell off in the US Dollar as a return to global risk appetite kicked in.

GBP/USD is approaching the 1.50 level again after a good start to trading and EUR/USD has tested the 1.3350 resistance level this morning. Last night we had the FOMC decision and as expected interest rates remained unchanged at 0.00- 0.25% and the statement commented that rates will remain low for "an extended period".

Furthermore the FED stuck to their guns following the March announcement that they will still purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year, as well as $300 billion of Treasury securities by autumn.

A similar theme in euro zone yesterday as we again saw improved confidence data against a downgrading of German GDP to -6.0% vs. -2.25% originally forecast. The euro is trading higher however as sentiment and focus on the improved confidence data helped the currency.

We also need to remember that the euro interest rates are higher than the UK, US and Japan and the increased risk sentiment into yield will help the euro. We can see similar gains when looking at other higher yielding currencies such as the AUD and ZAR which have all posted gains- particularly impressive is the ZAR- the USD against the ZAR has weakened from levels over 10 recently to 8.5 currently.

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Risk aversion trades take centre stage

Swine Flu continues to dominate wise money chatter.

Unfortunately it is the unknown that is causing the problem rather than anything definite and until we know whether the infectiousness of the virus, which originated in Mexico, can be contained by the World Health Organisation then we won't be sure of the financial impact.

The death toll in Mexico has risen to 149 and the WHO has upgraded its alert level to phase 4, one stage below the much more serious pandemic category. Phase 4 was the level at which the latter stages of the SARS outbreak was categorised.

Initially the Mexican Peso and the Antipodean currencies were hit hardest but concerns remain that if the situation worsens then sectors other than just agriculture will be affected.

The mediterranean countries are earmarked as likely targets (Portugal, Italy, Greece and Spain) with a downturn in air travel and tourism at a time that these countries can least afford it.

The Euro slipped sharply, not only on the move into Dollars but also following comments from ECB members Nowotny and Trichet. The former stated that Eurozone rates would stay low for a long time and that the Central Bank was ready to use additional measures if necessary.

Trichet reinforced this message saying the ECB will take decisions on new measures at their May 7th meeting- for the next week or so, the Euro is vulnerable all round.

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Sterling leads the way

Despite yesterday’s trading volumes being severely depleted resulting from the Bank Holiday across much of Europe and the UK; there was plenty of activity - both in the equity and the currency markets.

The Dollar dropped sharply in the Far East on heavy short covering in Euro/Dollar helped by rumours of strong buying from an Asian Central Bank.

The rate rose from 1.3170 to get to 1.3390 before settling at 1.3365 and dragged the other majors with it. Cable moved from 1.4665 to reach 1.4870 before easing.

Sterling however, has tracked higher again following a UK bullish article that appeared in the Telegraph in which the Lombard economist predicts that the UK Housing crisis will end by Christmas.

This will make today’s release of the March RICS housing market survey even more eagerly awaited with expectations of a slightly firmer figure from February’s -78.3% (the lowest figure in more than 30-years).

Survey data suggests that growth in enquiries and viewings have become more buoyant resulting in a modest uptick in sales although financing constraints combined with fears of unemployment continue to hold back any significant recovery in activity.

Sterling however has started this morning’s session on the front foot hitting a 5-week high against the Euro of 1.1198 Other UK data is sparse for the following 3 days with most figures of significance deferred until next week owing to the Easter holiday.

This leaves forex players again watching equity news for direction and we have already seen European markets open firmer with the early release of very strong Quarter 1 figures from Goldman’s.

The Dollar ought to recover some of its recent lost ground especially given North Korea’s comments that they are considering building their own light-water nuclear plant. This could very well weaken the Yen and send the cross back up through 100

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Eurozone interest rates at record low of 1.25pc

The European Central Bank has cut interest rates in the eurozone to a record low of 1.25pc, down from 1.5pc.

Economists had been expecting a bigger reduction of half a percentage point to 1pc, but speaking at a press conference after the monthly decision ECB president Jean-Claude Trichet did not rule out further cuts.

He said that rates may be cut "in a measured way," adding that while inflationary pressures were subsiding, the outlook for the economy remained poor.

"The latest economic data and survey information confirm that the world economy, including the euro area, is undergoing a severe downturn. Both global and euro area demand are likely to remain very weak over 2009, before gradually recovering in the course of 2010," he said.

The ECB's Governing Council has reduced interest rates by a total of three percentage points since early October, after the global financial crisis intensified following Lehman Brothers' collapse in September.

Mr Trichet said the ECB would announce "non-standard" measures at its policy meeting in May in an attempt to stimulate the eurozone economy, which officially entered recession at the end of last year.

The Organisation for Economic Co-operation and Development (OECD) predicted earlier this week that the eurozone economy would contract by 4.1pc this year. That is a significantly bigger drop than the 2.2pc to 3.2pc fall forecast by the ECB.

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Fed shock the markets with a bumper $1.15 trillion stimulus plan

The Pound and the euro rallied significantly last night against the USD as the Federal Reserve shocked the market with a $1.15 trillion boost for the US economy.

This has caused the US dollar to be sold off and we have broken through 1.40 again as the equity markets rally. $300 billion will be made available for longer term treasury securities and $850 billion for the ailing Fannie Mae and Freddie Mac.

The FX markets witnessed big swings with EUR/USD rallying to 1.35 and USD/YEN moving back down to 95.

The market is now looking for safe haven currencies outside the US dollar as currency risk is dissipated. Sterling gained against the USD but remained subdued in other areas and weakened against the EUR with a break of 1.05 now in reach.

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Range trading continues for currencies

Euro zone data released this morning (CPI and EU unemployment) has carried the theme of the week and met the consensus expectations.

The fact that CPI has remained steady will slightly ease the pressure on the ECB to cut interest rates in their March meeting. In the forex markets the theme of the week for most currency pairs has been range bound trading.

EUR/USD looks the most likely to break its current range as it approaches 1.26, GBP/USD is also approaching support at 1.4150 and GBP/EUR is being buoyed by USD strength against EUR.

Over the last week we have continued to see the YEN unwinding particularly against the USD falling 9% from the low to high point in the week- a major shift in sentiment!

This is not surprising after a poor start to 2009 for the Japanese economy; figures demonstrated that exports fell 46% in January alone and their economy sank 3.3% in the last 3 months of 2008. This weak data was exasperated by the resignation of the Japanese finance minister Shoichi Nakagawa following his erratic performance at the recent G7 meeting.

The weakening of the Yen as discussed earlier this week underlines a shift in sentiment away from a currency previously conceived as a “safe haven”.

The trend of the “Dollar Index” which tracks the US currency against a basket of currencies demonstrated this movement away from Yen and back into the dollar. The index has already increased 8% in 2009 as investors are now looking at the US dollar as the favourable option for safety.

This is ironic given the awful data arising from the US economy.... yesterday we saw durable goods fall 5.2% in January and jobless claims soared to 667,000- very weak data which only helped to strengthen the dollar as risk aversion and a flight to safety stepped up a notch.

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The euro is in the spotlight

The Pound held up well yesterday as the latest inflation data confirmed that CPI fell 0.7% in January bringing the annualized level to 3.0% which is down slightly from Decembers 3.1%.

The 3.0% level is still well above the Bank Of England’s 2% target for inflation and this data suggests that interest rates may not need to be cut in March as previously thought.

However inflation will remain a concern for the Bank Of England- Mervyn King has already signaled that inflation could fall sharply this year and todays BOE minutes will give us more insight to the sentiment of the MPC.

The euro was the big loser in the currency markets yesterday falling to 2 month lows against the dollar and also retreating against the pound…real concern is now prevalent on the health of eastern European banks.

With the threat of a downgrade in credit looming over eastern European subsidiaries of Swedish and Austrian banks coupled with the expectation of more banking losses in Europe forcing the euro lower.

The EUR/USD moved to a low of 1.2548 and 1.25 is now the key target before a break to 1.2312…GBP/EUR failed to hold above a move back to 1.13 yesterday, however this will again become the target as the spotlight remains on the euro and its woes.

Overnight the final approval was placed on the US stimulus package of $787bn which is desperately hoped will kick start the global economy. The urgency of Obama to introduce this stimulus was justified as General Motors and Chrysler have requested another $21.6bn on top of the $17.4bn already received.

This caused a sharp sell off in equities- in particular the Dow as risk aversion kicked in.

One to watch in the markets at the moment is USD/CAD which has broken a key resistance level of 1.26…with risk aversion and the falling value of Oil we could see this pair re-test the 1.30 level in the near term.

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Bank of England leads the way

Today is the day when the BoE could come very close to running out of bullets when it comes to the weapon of interest rates.

The outcome of today'€™s meeting is split with as many valid arguments for a 0.5 % cut a 1 % cut or even no cut at all.

An interesting development this week has been Sterling that has continued to rally and the market is coming to terms with the fact that the UK economy is front loaded with so much bad news that a rally in Sterling was a forgone conclusion.

Where Sterling goes after today'€™s announcement waits to be seen, but keep an eye on GBP/YEN, this will lead the way.

Expect very little action from the ECB today as a no change 2 % is all but built in and this may see in the short term some Euro buying- although some concerns are arising on the health of eastern europe.

USD/JPY is still stuck trading around 90.00 and the ongoing uncertainty in the US equity markets will keep this pair contained in an 85- 100 range.

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Euro US Dollar heading towards 1.40

There is at present a worrying divergence away from near term fundamentals and the strength of the US Dollar.

It would be wonderful to think that the market had extended its time horizon for trading currencies to encompass a more long-term view point but this seems unlikely.

A more probable reason for the continued strengthening is the fact that players are making money by buying it Let The Trend Be Your Friend, as they say. The downside to this strategy is of course, that without a fundamental basis for buying, the profit taking/selling is invariably just as severe. Watch for a reaction should the US non-farm payrolls this afternoon be worse than the -75K predicted.

On to actuals, the statement yesterday from the ECB following their Rate Meeting were neutral going on dovish. Trichet came out with his usual push-me-pull-you type statement, ensuring that the market were kept certain of the ECB's inflation fighting credentials whilst also emphasising the problems of the slowing economy within the Eurozone (following on from the reporting of the 8th straight monthly decline in German Industrial Orders).

The EU's Juncker was more forthright however. He stated that 1.44 reflected economic fundamentals better than 1.60 had done and that the Euro was still overvalued against the US Dollar at these levels. Cue further Dollar buying. Sterling was also caught in the backwash of Dollar buying and even though it hardly moved against the Euro yesterday, hit a 12-year low against a basket of currencies on account of the Dollar's weighting within it.

Mixed comments within speeches from Fed members Fisher and Yellen. The former remains hawkish, noting that the Fed must not get too excited about lower inflationary prospects following the decline in commodity prices as these price declines might not be sustainable.

Yellen had a much softer prognosis saying that she didn't think that the current Fed Funds rate was accommodative, that the prognosis for inflation had improved and that interest rates needed to be adjusted to reflect the US economy's current outlook.

There was continued grim news on the housing front with the Halifax survey showing that UK house prices had fallen by a further 1.8% in August leaving the average house price a staggering 12.7% lower than it had been in August 2007. Despite the gloom and doom in the news on the outlook for the UK, the MPC left Sterling interest rates at 5%.

The minutes of the meeting will not be released until 17th of this month and I still expect to see a 3 (for a cut of some magnitude), 5 (no change) 1 (rise) voting pattern.

The outlook for global interest rates is being updated all the time but at present the view is for substantial cuts both here and in Eurozone over the next 12 months period with expectations that UK Base Rate will be at 4% and that the Euro Discount rate will be at 3.5% by the summer next year.

There are expectations that we will see cuts in the US and Sweden and that the rate tightening cycle in Australia is over. All in all, the outlook is for substantially lower rates going forward with the possibility of yield curves becoming inverted or negative at the longer end.

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Weak IFO expected....

The Euro fell for a third day against the dollar on speculation the IFO Business Climate report will show today that confidence has slumped in Germany to a three year low.

The currency traded near a three-month low versus most major currencies and towards a six month low against the dollar with concern credit-market losses and slowing exports will stop the European Central Bank from raising interest rates this year.

The US dollar grew stronger on Monday and early Tuesday on the speculation of a weak German IFO survey, but could well decline later today with expectation of Sales of new houses in the U.S. likely to have fallen in July as mortgage lending dried up.

US homes purchases are expected to have dropped 0.9 percent to a 525,000 annual pace. Mounting losses on subprime mortgages have caused banks to withhold credit and boost borrowing costs, hurting demand even as prices are falling and making houses more affordable.

The decrease in sales has signalled the worst real-estate slump in more than quarter of a century.

The Pound fell against the dollar again on Monday, extending a fifth week of declines, the longest continued drop since February 2006. The UK Currency, slipped to its lowest level since July 2006 as effects of last weeks government report showed economic growth stagnated in the second quarter.

The report also added pressure to the Bank of England to set aside concerns about inflation and cut its benchmark interest rate, currently at 5%. With the UK inflation rate at more than twice the 2 percent target, the Bank of England have been reluctant to lower interest rates, and understandably so.

The Australian and New Zealand dollars continued their recent declines as concerns credit-market turmoil will widen prompting investors to sell higher-yielding assets funded in the Japanese currency.

The New Zealand dollar fell to its lowest level in over a week, and the Aussie dollar to a four month low against the most traded currencies on speculation that the nations bank will cut Australian interest rates from the 12-year high of 7%.

Crude oil was little changed after rising yesterday as Tropical storm Gustav formed in the Caribbean Sea, raising concerns it may disrupt production at oil fields in the gulf of Mexico.

Gustav has strengthened to near hurricane force with winds about 70 miles an hour and was moving towards the gulf. Prices also rose after Russian lawmakers voted to recognize the independence of two breakaway Georgian regions, increasing the prospect of further tensions in the area.

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Wise Money sees no surprises on Thursday.

Following the much hyped 25bps rate increase from the ECB yesterday, it seems Monsieur Trichet may have disappointed Euro bulls in the statement that followed.

With his moderate tones, he commented on the risk of further upside inflationary pressures but at the same time he remains concerned about growth, this along with his "no bias" sentiment put the euro immediately under pressure, not helped by a stronger US Dollar.

With perfect timing the Fed released the often volatile Non-farm payrolls at exactly 1:30pm. The jobs number for the month of June was bad but not bad enough to stifle the gains in the US dollar. Non-farm payrolls fell by 62k, the sixth consecutive decline in a row.

The April number was revised down from -49k to -62k while the unemployment rate remained at 5.5%, matching the highest level since October 2004.

Anything short of 100k had been viewed as being dollar positive and that is exactly how the market reacted. The biggest contributors were healthcare, education, leisure and government. The biggest losers were in goods producing and business services.

Elsewhere UK PMI services reported further contraction last month. Britain's dominant services sector shrank in June at its sharpest rate since the aftermath of the 9/11 attacks on the United States, a survey showed on Thursday, in a sign the economic slowdown is gaining traction.

However, signs from the CIPS services survey that companies are managing to ramp up their prices to partly offset record high cost inflation are likely to reinforce the view that the Bank of England is unlikely to cut interest rates any time soon.

The Bank's quarterly credit survey, also published on Thursday, showed the credit squeeze for households and businesses looked set to intensify over coming months as lenders braced for defaults amid a deteriorating economic outlook.

Today being a New York holiday should prove to be relatively quiet and there is a severe lack of data due for release.

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