ProgressiveFX.co.uk

A tumultuous week in financial markets saw Sterling reach multi year highs against the Australian Dollar as the Reserve Bank of Australia cut interest rates by 1% and saw carry trade positions reversed. GBPAUD swung violently between 2.71 and 2.3093 and settled around 2.5656 on Friday. Against the Euro the Pound reached high?s of 1.2980 as the banking crisis erupted throughout Europe and the scale of the problems facing European banks became clear. Germany, the world?s fourth largest economy announced financial support of its banking system. Sterling failed to hold on to its gains and traded down to 1.2518 having touched session lows of 1.2378 on Friday and back up to 1.26+. 

The US dollar strengthened against both the Euro and Sterling as the Dollar further maintained ?safety in quality? status. Quite a turnaround when you consider that the sub-prime problems eminated from the US, there is no great evidence that the US trade deficit has narrowed, house price are continuing to fall, unemployment continuing to rise, Stock markets plunging as investors scurry for cover and corporate?s & institutions struggle for credit lines and day to day funding.

As US dollar positions have been hedged against oil, their paths are woven for now and as the greenback gathers strength, oil prices have fallen back to $77.80 Brent spot and $82.60 Nymex crude futures. Clearly demand for oil is weakening in the face of lower demand and that in turn will lead to decreases in overall inflationary pressures, thus leaving the world?s central banks more able to lower interest rates; which is exactly what happened on Wednesday in coordinated action from the Bank of England, European Central Bank, US Federal Reserve whom cut rates by 50 bpts a peace confirming that the extreme volatility in global markets and growth prospects or lack of them as the case Is likely to be, was more of a concern than heightened forward inflationary pressures. Cuts in interest rates were also actioned in Canada, China, Switzerland and Sweden.

Gloomy as it is, the tax payer funded bank bail outs around the world may in the longer term sustain the financial system?s short term problems but it is unlikely to avert a recession. The ?spend it like Beckham? days are over!