Like the nations MPs, currency rates for the pound remained under pressure this week, as the expenses scandal continues to haunt UK politicians. You know things are bad when you have to pay for your own gardening and the pound fails to crack 1.08 against the euro. Yet positive signs from the labour market may have revived some faith in the pound, and we may see the UK enter the recovery phase soon.

In the UK last week, the lowest inflation rate in 5 years put sterling under pressure, although Bank of England MPC member Charles Bean revived some confidence by talking about an end to quantitative easing. The pound received a boost late in the week as jobless claims rose by 21,000 which was less than markets were expecting and the unemployment rate held at 7.9%. This is largely due to a lower rate of redundancies and average earnings figures were unchanged from last year.

This news sent the pound to a 3-week high against the US dollar, rallying above the 1.60 resistance level to touch on 1.61. Economists are predicting the UK economy could be close to a turning point, however at present, the underlying trend in sterling remains bearish. This week brings government borrowing figures and the latest MPC minutes.

Exchange rates for the greenback are also on the back foot, after minutes from the MPC meeting showed that US interest rates are likely to remain low for some time. This sent the US dollar to a 14-month low against the euro and 15-month lows against the New Zealand and Canadian currencies. Near-zero interest rates are making the dollar an attractive proposition for carry trades at present. Consumer price index figures and jobless claims are expected to be positive for September, which could induce some volatility later in the week.

The euro has continued to benefit from a rise in risk appetite, reaching a 14-month high against the US dollar to trade just below 1.50 after the Fed indicated interest rates would remain low. German ZEW economic expectations came in slightly weaker than expected, surprising markets after positive manufacturing data earlier in the week. The German economy is expected to grow by 1.2% next year after shrinking 5% in 2009.

Elsewhere, emerging markets stocks have posted their longest rally in four years on the back of rising oil prices and improved figures from China. Japan voted to keep interest rates on hold and the Australian dollar remains buoyant, trading at its highest level in around 25 years against the pound. Australian interest rates are the highest of the G10 nations at present and strong demand from Asian markets is driving the economy forward.

While the picture remains glum in the UK, with high government debt and interest rates expected to stay low throughout 2010, jobless figures this week show that the pace of decline is moderating. At present the weak pound is supporting the UK export sector and the Bank of England may look to reign in quantitative easing levels in the first half of 2010.

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Have a good week!

Nigel Hodges (Currency Solutions).