UK Government in spotlight as spending cuts are to be revealed

It is a factor that is hard to fathom. How currencies with a less robust economy behind them can continue to strengthen. The New Zealand dollar for example. In spite of impressive numbers out from Germany yesterday, the Euro was sold off against the US Dollar and Sterling, suggesting it has reached overbought status. Longer-term, the Euro needs to be more competitive to prevent a collapse in trade and tourism for some of the hardest hit economies in Euroland; a factor that could set back the recovery process quarters, if not years.

Foreign Exchange Brokers yesterday saw the US Dollar regain some ground against both the Euro and Sterling, strengthening by almost 3 cents against the Euro and over 2.5 cents against Sterling. The Australian dollar also had an interesting day as it was sold off against the US Dollar and Sterling, with Sterling closing the day 2 cents better off than it started.

The catalyst for the US Dollar wasn't the plethora of Federal Reserve speakers, who between them reconfirmed that the US economy is fragile and may need further stimulus, it was China.

The surprise move by China to raise interest rates by 0.25% helped to stem the tide of negative sentiment against a rapidly falling US Dollar. In fact, yesterday's US dollar rally was the largest one day move up in the US dollar index since the 11th August and, if sustained throughout the remainder of this week, could signal a drastic change in fortune for the US Dollar.

Today though it is Sterling's turn to be in the spotlight with the publication of the minutes from the last Bank of England monetary policy committee (MPC) meeting which are expected to highlight a 7-1-1 vote (7 in favour of leaving interest rates and QE on hold; 1 in favour of increasing interest rates; 1 in favour of lowering interest rates and expanding QE).

At the same time, Chancellor Osborne will outline his plans for spending cuts with the markets looking for the Government to hold firm on its committments to reduce the deficit since it came to power in May and may react to any wavering in it's determination by selling Sterling.