Sterling experienced large falls on Wednesday after the Fed’s Beige Book report showed growth in the US economy at the end of 2010. But this fall was to be short-lived, as Portugal’s successful bond auction was followed by news that EU governments are prepared to show strong report to the region in an effort to curb debt sovereign worry contagion.
Britain’s trade deficit was at its biggest since records began in January 1980, with numbers showing Britain's trade deficit widening to 8.736 billion pounds from October's 8.59 billion and beating expectations of 8.33 billion.
The BoE started a two-day meeting on Wednesday and rising inflation expectations are likely to dominate the Monetary Policy Committee meeting. The decision will be announced on Thursday, although there is very little chance of a rate increase.
The euro stabilised on Wednesday after a successful Portuguese bond auction eased fears over Europe's sovereign debt problems. Portugal was able to sell 1.25 billion euros in government debt, with interest rates falling slightly on its longer term bonds. With the European Central Bank likely involved in snapping up bonds, the borrowing cost on its 10-year bonds slipped slightly to 6.717 from 6.8 percent at its previous auction.
This is all very positive after reports surfaced earlier this week suggesting that Germany and France were urging Lisbon to work out a rescue plan, but talk of a bailout is likely to subside for now.
The world will continue to watch Europe today as Spain and Italy, also struggling to attract investment at sustainable rates, will tap the bond markets, just as the European Central Bank makes its next interest rate announcement. Analysts expect the sales to go without a major hitch, but at elevated costs.
The dollar drifted lower against a basket of major counterparts on Wednesday, as a successful bond auction for Portugal boosted appetite for riskier assets.
The US economy strengthened in the final months of 2010. The Beige Book report showed the jobs picture brightening across the country and the twelve Fed districts generally reported that conditions were better in the manufacturing, retail, and non-financial services sectors than in the financial services or real estate sectors.