Last week saw Sterling recover some ground again against the Euro, reaching a high of 1.1350 on Friday night. This was primarily driven by the IMF re-evaluating its forecasts for how deep the recession will be among the major world economies. Although the UK figure was adjusted from -1.6% to -2.8% for 2009, the adjustment for the Eurozone and German economies was significantly greater, weakening the Euro against Sterling and the US Dollar.

As the market opened this week, we saw the Euro stage a recovery against Sterling, moving back down into the 1.10s at mid-market level. This was due to a number of factors, including the downgrading of Barclays Bank by credit rating agency Moody’s, who expect that the company will suffer significant further losses as a result of bad debts being exposed by the credit crunch. UK PMI Manufacturing data was also extremely weak, despite being slightly better than December. The PMI release came out at 35.8 which, although an improvement on December’s figure of 34.9, is still extremely low when compared to historical data.

The key focus this week will be the interest rate announcements from the Bank of England and the European Central Bank. The current consensus among investors is that the Bank of England is going to cut by 0.5% again down to a base rate of 1%, whilst the ECB are likely to leave the rate unchanged at 2%, after ECB President Trichet’s comments last week that the next significant ECB meeting would be in March.

A base rate reduction will normally result in a country’s currency weakening, as any investors will be getting a lower yield on their deposits, so the market should begin to price in a rate cut for Sterling as the week goes on. However any deviation away from the central banks’ expectations may result in a correction. Other important data releases this week include the PPI inflation data from the Eurozone on Tuesday and the UK on Friday, and the Retail Sales figures from the Eurozone on Wednesday.