Mervyn King spoke last night in the city and warned of the ‘most difficult economic challenge for 2 decades’ to face the UK. Growth will fall along with house prices and inflation will rise possibly to 4%. King’s tone was fairly hawkish as he reiterated that the MPC is ’prepared to take whatever action is needed’ to bring inflation back to its 2% target. Sterling yesterday was fairly calm as all data was released as expected but some upside was seen as speculators hopped back in after Monday’s dramatic sell-off.

Profits at Morgan Stanley fell in Q2 fell by 57% with senior execs blaming the credit crunch. The news gave the dollar a bit of a wobble yesterday and combined with rising oil prices is now trading a cent higher against the euro and sterling.

Apart from this morning’s UK retail sales all data is American and every release is expected to weaken the greenback.

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