Euro woes continue as debt problems persist

The Bank of England's decision to leave monetary policy unchanged yesterday with interest rates remaining at 0.5% and no extension to quantitative easing came as no surprise. The MPC are currently looking at the economic situation, which is reporting sluggish growth and high inflation, and worrying more about what they can't control (such as high inflation which is filtering through because of the higher costs of buying Euros and other currencies to purchase imports), rather than trying proactively to support growth.

The situation may alter as the Government spending cuts bite, as monetary policy needs to compensate for a restrictive fiscal policy. As such, there is still a reasonable prospect for renewed expansion of quantitative easing, but that may now come until late in the second quarter of 2011.

The Euro's woes continued yesterday after the Labour Party in the Irish republic voted against the bailout given that the current Government do not have a majority. Moreover, concerns regarding the fiscal solvency of Portugal continue to increase. This led to the Euro underperforming against the major currencies with the Christmas holiday period unlikely to provide any respite for Eurozone, given that the authorities remain in reactive mode.

Sterling shrugged off a decline in house prices and a worse than expected trade deficit for October, due to rising imports, to continue to push the Euro lower as concerns about debt problems in Europe continue.

The New Zealand dollar has weakened following the Reserve Bank of New Zealand's decision to leave interest rates on hold. The damage has been done to the Kiwi by the announcement that the rate increases over the next two years will be less than previously expected as policy makers believe the Kiwi is too strong.

Today, US trade balance numbers are due out for October with expectations for a deficit of $43.8bn, while later on University of Michigan Confidence for December is expected to increase to 72, from last months 71.6.