The news that the Bank of England’s MPC are keeping the option of reducing the rate of interest banks receive on deposits in a effort to avoid a liquidity trap sent sterling spiraling yesterday. Governor King said that it would be a “useful supplement” to stimulate the ailing UK economy as it has proved to be in Sweden, where this has been in effect for 3 weeks or so. The aim is to raise lending and stop banks hoarding cash.

GBP fell to a 4 month low against the euro with similar dips seen against the dollar, Swiss franc and Japanese Yen as the market quickly lost belief in the pound’s recent rally.

The announcement overshadowed the news that inflation in the UK has fallen to the lowest level since January 2007 although the 1.6% figure was higher than the 1.4% market estimate. This follows are exact thoughts that inflation here in the UK will remain more sticky for a considerable time.

Weak data from the EU was not even able to rescue the beleaguered pound either as German ZEW disappointed. Sentiment rose to 57.7, a 3 year high, although it did miss the estimate of 60.

The US did not miss a beat yesterday however as retail sales surged 2.7% last month. A large part of this is being devoted to the US government’s ‘Cash 4 Clunkers’ program to invigorate the auto industry and subsequent dips once the program ends are expected. NY manufacturing was also strong while PPI moved above estimates too.

Data today includes unemployment data from the UK which given, in the opposite of the inflation data, has been overestimated more often than not over the past 6 months could provide a moderate fillip for the pound at 9.30. We also both European and us inflation measures and US TIC flows.

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