The euro rally continued in early European trade today after the IFO survey of business confidence handily beat expectations printing at 83.7 vs. consensus calls of 82.1. The IFO release was the third positive economic surprise from the EZ this week, following on the heels of better ZEW and PMI data numbers. As a result the EUR/USD has rallied more than 300 points off the week’s lows as short covering continue unabated.

UK Chancellor of Exchequer Alistair Darling announced that UK government will borrow 269 billion pounds more than previously forecast as this year’s UK fiscal deficit will total more than 12% of the GDP - the highest figure in the G10 universe. Mr. Darling also proposed that tax on income earners of 100,000 pounds or more be raised to 50%.

UK jobless claims rose by 73.7K versus estimates of 118K, printing at nearly half the level of the month’s prior reading of 138.4K while the unemployment rate matched expectations reaching 6.7% - its highest level since 1997.

USD/JPY took out the key 100 level mark on a stop fueled rally in Asian session while cable ran through the 1.4800 figure in a lively pre-NFP action as currency markets prepared to end a volatile week of trade. In Asia very aggressive buying from option related accounts knocked out the 100 barrier in the pair backed by continuation of risk appetite in the afterglow of the successful G-20 summit.

UK PMI Services report improved markedly rising to 45.6 versus 43.2 the period prior and 43.6 consensus call. The upside surprise in the PMI Services report caps a good week for UK economic data with PMI Manufacturing and PMI Construction releases improving as well. The news provides the strongest evidence to date that the contraction in UK economic activity may have finally leveled off, although all three gauges remain below the key 50 boom/bust line.

As officials met for the G-20 meeting currencies were mixed with no overall theme defining trade today. In Japan the TANKAN report recorded its worst reading ever but the data had little impact on USD/JPY. Instead the pair reacted to a Bloomberg story that the Obama administration was considering bankruptcy for the auto companies which spurred a wave of risk aversion that dropped the USD/JPY more than 100 points in a matter of minutes. However, the pair spent the rest of the night crawling back to 9900 with many traders now targeting the psychologically important 100 level for a stop run.

UK Retail Sales printed much worse than expected coming in at -1.9% vs. -0.3% forecast as UK consumers faced with the worst labor market conditions since the early 1980’s sharply cut their spending in February. The news was not totally surprising given the weakness in the overall UK economy and the steep drop in CBI March Distributive Trades survey yesterday.

The pound lost more than 200 points by early London trade after the currency came under assault on multiple fronts as the economic fundamentals of the UK economy deteriorated further, UK jobless rolls swelled by 138.4K versus expectations of 84.5K as the overall unemployment number crossed the critical 2 Million mark. The claimant count rate increased by 4.3% versus 4.0% forecast while average earnings including bonus dropped from 3.2% the month prior to 1.8% in January. Additionally the unit was hurt by an earlier report from IMF that suggested UK recession could last well into 2010.

UK jobless rolls swelled by 138.4K versus expectations of 84.5K as the overall unemployment number crossed the critical 2 Million mark. The claimant count rate increased by 4.3% versus 4.0% forecast while average earnings including bonus dropped from 3.2% the month prior to 1.8% in January.

Cable has fallen a remarkable 400 points at the starts of this week’s trade hitting lows not seen since the end of January. What’s behind the sell off and is it likely to continue? Tonight’s drop in the pound was triggered by yet more bad news from the UK banking sector. Shares of Lloyds PLC tumbled 14 percent after UK’s biggest lender ceded corporate control to the government in return for state guarantees covering more than $367 Billion of assets.

Cable started the week with a 200 point drop as investor worries over the state of UK banking sector pressured the Footsie and sent the currency tumbling below the 1.4000 level for the second time this month. Shares of Llyods PLC tumbled 14 percent after UK’s biggest lender ceded corporate control to the government in return for state guarantees covering more than $367 Billion of assets. The news dragged the Footsie lower by more than 1% and pressured the pound into the early morning London trade.

Both euro and pound recovered off their North American session lows in a quiet rangebound session that carried very little event risk on the calendar. However, the star of the show in currency market tonight was the Australian dollar which singlehandedly revived risk appetite after the RBA surprised traders by keeping its overnight cash rate at 3.25% instead lowering it by 25bp as expected.

The euro consolidated near the 1.2700 figure in early European trade boosted by better than expected German Consumer confidence numbers while pound tried to shrug off RBS news which reported the largest corporate loss in UK history and announced that the government may take up to 95% stake in the company.

The Q4 revision of UK GDP proved to be better than the dour consensus estimates of -1.6% printing at -1.5% but offered little help to pound bulls today as the pair sold off towards the 1.4500 handle in the aftermath of the release. Although the results were nominally better than forecast skepticism abounded in the currency market that these figures will not mark the lowest point in the UK economic cycle.

The revision of Q4 UK GDP left the number unchanged at -1.5% but the print was actually better than expected as the market consensus forecast a further contraction to -1.6%. The news confirms what much of UK data has been signaling over the past few weeks – namely that the economy in the British Isles may starting to bottom out.

The EUR/USD gave up much of yesterday’s gains in Asian and early European trade as risk aversion and woeful PMI flash readings kept the unit under pressure for most of the night. UK data on the other hand registered another upside surprise keeping pound within reach of the 1.4300 figure.

UK Retail Sales posted a gain of 0.7% versus forecast of 0.0% surprising the currency market which was geared for a much weaker result. December's data was also revised upward coming at very healthy 1.6% rate. The news confirms the sharp rise in BRC retail sales earlier in the month and suggests that UK economy may be more resilient than the market current dour consensus.

On a night when the rest of the G10 currencies consolidated their losses in listless, event free trading, cable was the main source of action dropping 200 points from its highs on news that Bank of England voted unanimously for quantitative easing. The BOE voted 9-0 to expand its monetary policy initiatives beyond rate cutting and 8-1 to lower rates by 50bp with Blachflower once again calling for 100bp cut.

It is a dollar story in the foreign exchange market today as the greenback rises against every major currency. Although earlier risk aversion contributed to the strength of the US dollar, the underperformance of the Japanese Yen suggests that revenge of the low yielders is not the theme in the currency market. Since we are still waiting on the economic stimulus package, the market has shifted its focus away from politics and back onto economics. The comments about sovereign debt ratings by ratings agency Moody have spooked currency traders.

UK unemployment data proved more positive than expected printing at 73.8K versus forecasts of 88.5K new jobless claims. Average earnings also recorded an upside surprise coming in at 3.2% versus 3.0% expected.

UK GDP data printed much worse than expected sending pound to fresh multi year lows as the report confirmed that the country has officially entered into its first recession since 1991. The UK GDP showed a contraction of -1.5% versus -1.2% expected as the full impact of the collapse of global capital markets has finally hit the finance driven economy.

The drop in the GBP/USD at the start of this week has been nothing short of astonishing. In less than 48 hours the pair erased more than 1000 points off its price depreciating by more than 6% against the dollar. Although cable has been in decline since the turbulent markets of last fall, this latest freefall carries a whiff of true panic about it as markets fear that that UK government spending schemes to rescue the country’s ailing banking sector will put unsustainable stress on the Treasury.

After climbing back to 1.4000 in early Asia session on profit taking by the shorts GBP/USD tumbled for the third night in a row as traders treated the currency as though it was covered in radioactive waste. An article in London Times which basically called for selling every UK asset was the trigger for the latest downdraft, and the overnight economic data did little to bolster the case of pound bulls.

The assault on the pound continued for the second night in a row as the unit hit a 7 year low plunging through the physiologically critical 1.4000 level for the first time since 2001. FX traders feared that the massive new UK government spending schemes to rescue the ailing banking sector would result in further deterioration of country’ s balance sheet effectively devalued the currency by 3% overnight.

Pound liquidation continued unabated for the second day in a row , as traders absorbed the details of the UK rescue plan and grappled with the massive losses posted by RBS. Many of the market participants are coming to a creeping realization that the UK banking sector may have to be nationalized as a result of the recent events.

Flight to safety continues to drive the US dollar higher against all of the major currencies outside of the Japanese Yen. US markets were closed today in observation of Martin Luther King, Jr. Day but that has not limited the volatility in the currency market. Europe dominates the headlines with big developments in the UK and Spain. Most Americans will be distracted by the Presidential Inauguration tomorrow, which leads us to comment on the possibility of an Obama Bounce on Tuesday.

Not a pleasant start of the week for pound bulls with cable crushed on the open of London trade, falling nearly 300 points from the day’s high in response to the second version of the UK rescue plan of its banking sector. The plan announced by UK Chancellor of Exchequer Alistair Darling proposed creating an insurance scheme to underwrite the toxic debts on the books of UK banks. The scope of the program could reach 50 Billion pounds. Additionally UK authorities increased the government stake in RBS to 68% from present 58% share. UK PM Gordon Brown went out of his way to criticize the RBS management, noting that the bank was wholly irresponsible it its investment decisions and that most of its losses came from its exposure to US mortgage backed securities as a result of RBS’s acquisition of ABN-Amro.

The pound was decimated at the start of weekly trade today dropping more than 200 points off its highs as traders absorbed the details of new UK government rescue package of the banking sector.

UK manufacturing plummeted by -2.9% against forecast of only -0.5% dragging pound lower in early London trade, but the unit managed to recover most of its post news release losses as focus shifted to the US Non Farm payroll report due later today at 13:30 GMT. Part of the reason for currency market’s rather nonchalant reaction to the worst UK manufacturing reading since 1981 may have to do with the fact that the manufacturing sector comprises a relatively modest percentage of the UK economy which is much more service oriented than the large economies of the Eurozone.

Bank of England dropped the benchmark UK interest rate to 1.5% easing by 50bp as expected. The Monetary Policy Committee noted that the sharp drop in the pound provided additional stimulus to the UK economy tempering the need for more drastic rate cuts at the present time. The Central Bank acknowledged the severity of the UK recession stating that business and consumer confidence have declines markedly while noting that output is likely to drop sharply in the first half of 2009.

With Japanese markets closed for Emperors birthday, currencies spent the night in quiet pre-holiday trade essentially marking time until dealing desks close tomorrow evening for the Christmas holiday. The euro made another run at the 1.4000 level boosted by better than expected French consumer spending and Current Account data, but the rally fizzled into the early European session as traders continued to square up their books.

Evidence of oncoming holidays was all around the currency market tonight, as trading slowed to a crawl and the economic calendar was essentially barren of any significant data. Nevertheless, the euro managed to stage a rebound rally pushing above 1.4000 once again as better risk appetite in Asian markets and the oversold conditions in the unit created a perfect set up for a short covering bounce.

The anti-dollar rally continued in Asian and early European trade today in the aftermath of yesterdays surprising -75bp cut by the Federal Reserve, but the pace of gains was decidedly more muted as currency traders booked profits in the wake of lackluster equity market performance and downcast economic data from UK.