The US Dollar was yesterday's big mover, declining sharply after a warning from rating agency Moody's turned the heat up on the US currency heading into today's two-day Federal Reserve policy meeting.
Moody's said that it expects to slash the US's credit score if the country does not make rapid progress on curbing it's government spending. The US Dollar started yesterday around £/$ 1.5990 against Sterling and €/$ 1.2790 against the Euro; at this morning's open, Sterling was at £/$ 1.6090 and the Euro was at €/$ 1.2870 which are both four-month highs. With expectations increasing that the US Federal Reserve will launch QE3 tomorrow further declines in the US Dollar may be likely.
Elsewhere, Europe will today move a step closer to a "banking union" with plans for the European Central Bank (ECB) to oversee banks as part of their efforts to resolve the current financial and economic turmoil. For the plan to work, it will require countries to surrender a degree of sovereignty over supervising their banks.
Although the UK will not join the scheme, many international banks in London have operations in the Eurozone which will be affected by the ECB's new supervisory reach. London is also worried that the ECB, emboldened by its new powers, will demand regulation that could undermine the city's position as the European financial capital. The markets are ever fearful of uncertainty and the outcome of today's announcement may well have ramifications for the Euro and Sterling.
Data yesterday showed the UK's trade deficit narrowed more than expected in July. Meanwhile, new Bank of England policy maker Ian McCafferty reserved judgement on quantitative easing (QE) in testimony before members of parliament's Treasury Select Committee on Tuesday. He said any decision on further economic stimulus would hinge on more evidence about the health of the economy.
Today sees the release of UK labour market figures, which are expected to report a further fall in unemployment rates, Eurozone industrial production and US import prices. Overnight the Reserve Bank of New Zealand are expected to leave interest rates on hold at 2.5%.
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