Sterling enjoyed its best day against the euro in over 3 years in a 3.4% shift that showed the cracks in the EU’s armour that we have been expecting. Primarily inflation figures out of Italy and Spain were a lot worse than expected which would lead us to believe that the markets have begun to price out an interest rate hold by the ECB for this month. We would like to see a 50bps cut from Frankfurt in January.

Our assertions have been backed up by ECB voter Papademos’ belief that “If, in our assessment, the risks to price stability change further in the coming months, monetary policy could be eased further and we will act appropriately”. It was also publicised yesterday that a fair few Italian local governments have lost large amounts of money playing the markets over the past 12 months.

The euro may not get much respite today either as HICP, given the falls on the Spanish and Italian measures, may be marked down further than expected. We are wary of charting this as the green shoots of recovery and would remind all euro buyers that should the Bank of England sway from expectation these gains could be wiped out faster than you scraped your car’s windscreen this morning.

The US dollar was also a good gainer against the euro and many other currencies yesterday as more details of Barack Obama’s stimulus package became clearer. $300bln of tax cuts as part of a total of $775bln helped equity markets higher and allowed commodity currencies to have a good run. The risk atmosphere has slackened in recent days but the picture is still onerous; oil for example jumped to $48 a barrel after increases in the fighting in the Middle East.

Apart from the European inflation data due today PMI figures for both the European and UK services sectors should cancel each other out. Equity markets and risk lovers managed to shrug off a poor manufacturing ISM figure from the US on Friday; we’ll see if the reaction is that strong to a predicted poor non-manufacturing release. Fed minutes from the decision to cut rates to 0% are also due tonight.

Please feel free to contact me (jeremy.cook@worldfirst.com) if you have any questions or thoughts regarding these updates or if you are interested in a particular event in the calendar. If you would like to discuss your foreign exchange requirements, please contact our:

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