Sterling fell by 1% against the US dollar yesterday after UK manufacturing data dropped to the lowest level in 2 years offering investors a stark reminder of the headwinds that face the UK economy. Markets now expect an interest rate hike of 0.25% in December 2012. At the start of the year, that expectation was for a rise in April of this year at the earliest. Whilst the Bank of England did not discuss further Quantitative Easing last month, there have been increasing calls for a second round of stimulus – notably from business secretary Vince Cable. Out later today there is construction activity data which could cause some volatility, so call in now for a live exchange rate.

In the euro zone, the euro fell further against the US dollar as stock losses and weak US manufacturing data hurt risk appetite. In addition, concerns over the ability of politicians to rein in the euro zone debt crisis and the threat of a US credit rating downgrade will keep peripheral bonds yields high for some time threatening a further bail out in the region. It is a quiet day for data, but volatility is likely to be high with the USA’s debt ceiling deadline looming this evening.

In the USA, the US dollar hit a record low against the Swiss franc and a 4 ½ month low against the Japanese yen as markets began to question the fiscal credibility of the world’s largest economy. Republicans and Democrats eventually reached a compromise on spending cuts over the weekend, and the House of Representatives approved the deal last night. Markets are still concerned that credit rating agencies will still downgrade the US credit rating as the cuts package fails to go far enough. One rating agency said that a $4 trillion package would be needed to avoid a default – this package only covers $2.4trn. US manufacturing followed the UK figures in underperforming and didn’t help investors’ feelings towards the US dollar. Call in now for a live exchange rate.

Elsewhere, the Swiss franc strengthened to records against the dollar, pound and euro as concern that US government debt will be downgraded stoked demand for the haven currency. In addition, the South African rand declined against the US dollar after the poor US manufacturing report. Call in now for a live exchange rate.

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