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The euro continues to confound expectation and make gains in this hostile atmosphere; even with Portugal’s economic and political problems clear for all to see. The single currency crashed through levels against the pound, sending it to levels not seen since November 5th while it also sniffed the 1.42 level in EURUSD.

This is all despite the Portuguese government falling apart over an austerity vote with a general election likely and ratings downgrades by Fitch and S&P overnight. Then if you add in the Moody’s decision to cut the ratings of 30 Spanish banks and the news that Irish GDP fell by 1.3% in Q4 you have to wonder what is propelling EUR. The simplest answer is continued bullishness over possible interest rate increases in the Eurozone. Trichet and other members of the ECB seem hell-bent on increasing interest rates even while the periphery is still on the teat. If it is the only reason then I am amazed that it has put on so much in the past few weeks and of course it means that any disappointment from the ECB would see the euro get crushed.

Sterling was also the architect to some of its downfall with a poor retail sales figure release. It looks like UK consumers brought forward spending last month to beat the 2.5 percentage point increase in VAT while still being fearful of unemployment and the government’s austerity measures. We saw poor results from Sainsbury’s on Tuesday and if they are feeling the pinch then the smaller family stores and independent retailers are bound to be in a worse position.

If inflation stays high, as predicted in the Budget, then we are going to see these companies increase prices, further disincentivising consumers from spending in the 2nd half of the year. Hopefully this will reiterate to the MPC that while inflation is high, the overall growth profile of the UK (consumer spending, business lending, the housing market) is too perilous for an interest rate rise anytime soon. This put sterling on the skids from which it has not recovered.

The only prospect for it to increase this morning is from a fall out at the EU ministers conference that continues today in Brussels.

Latest exchange rates at time of writing