Aussie and Kiwi Dollars tumble overnight

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Sterling bounced back against the Euro and the US Dollar yesterday morning following a fall in UK employment claims. The Office of National Statistics reported that claims unexpectedly fell in February by 10,200, the largest drop in eight months and the lowest figure since February 2009, adding to recent optimism that the UK economy is recovering after the fourth quarter slump.

The unexpected improvement in labour market conditions will be a source of comfort to officials, with up to 500,000 jobs expected to be lost over the next four years and may be seen by the Bank of England as further evidence that the economy is recovering. Is it enough to convince the Bank of England to increase interest rates remains to be seen. Sterling subsequently rallied, rising towards 1.1530 against the Euro.

Sterling didn't do so well following the Organisation for Economic Co-operation and Development (OECD) revised down it's forecast for UK GDP growth to 1.5% from 1.7% and raised it's CPI forecast to 3.3% from 2.6%. The OECD also suggested that the Bank of England should raise rates slowly from the middle of 2011. UK Chancellor Osborne echoed the OECD statement by saying "the Budget (on 23rd March) will echo the central message from the OECD".

In the Eurozone, CPI was confirmed at 2.4% in February but the core rate remained subdued and fell to 1.0% from 1.1% previously. The data did little to change the markets mind that the the ECB will raise interest rates next month, taking the Euro to a 5-month high against Sterling.

There has been huge volatility overnight with commodity currencies collapsed as concerns over Japan continue. There is fresh anxiety around nuclear reactor instability, and investor risk appetite has tumbled. The New Zealand Dollar has fell 6 cents and the Australian Dollar 3 cents overnight to open this morning at 2.24 and 1.64 respectively.

There is plenty of US data today with CPI and industrial production for February and the March Philly Fed manufacturing data due for release. Higher headline CPI inflation is expected, as is robust growth in industrial production, but the Philly Fed is expected to fall back.