The Pound has been pulling all sorts of party tricks! Having done a great limbo impression, Sterling has bent over backwards to reach new lows this week, not once but three times against the Euro.

While talks of parity are a little premature, the downward run on Sterling shows no sign of abating with the Pound sitting at 1.11 this morning. To add insult to injury, markets deemed Britain had a greater credit risk than McDonald's to the average investor. What is the world coming to?!

As the global economic downturn gathers momentum, new lows and new challenges have emerged this week. The Pound has hit a record low against the Euro, plunging over three consecutive days to trade at 1.11 this morning. Nations around the world are continually revising growth forecasts with even India and China beginning to feel the impact of the downturn.

In the UK this week the Pound has been absolutely battered by the weight of negative economic data. The National Institute of Social and Economic Research reported that the UK economy contracted 1% in the 3 months to November and figures released showed declines of 2% and 1.8% respectively in the manufacturing and industrial production sectors.

The CBI Industrial Trends survey confirmed the bleak state of the economy and analysts are predicting this recession is shaping up to be comparable with the big 3 since the end of WW2.

All the positive effects of low value Sterling for exporters and inflation are being negated by market conditions as export markets shrivel up and the OECD has described the business climate as 'severe'. In the absence of major data from the US and Eurozone to divert market attention, the Pound was shunned by investors and sunk to record lows against the Euro while remaining in the vicinity of 1.47-1.5 versus the Dollar.

In the US overnight, Senate failure to reach a consensus on the $14 billion bail out for the US car industry sent Wall Street and equity markets around the world plummeting in a return to risk aversion.

That aside, the week has been relatively uneventful for the US Dollar with RBS describing the tone of markets as one of 'consolidation'. Last 'non-farm Friday' showed US unemployment had risen to its highest rate in 34 years and today markets will be interested in retail and consumer price indices.

The Federal Reserve Interest rate decision is also due next week so watch for Dollar volatility surrounding the announcement. While the Dollar has been strong on the back of risk aversion recently, as a degree of confidence returns - or as markets become desensitized to bad news, take your pick, we may see some weakening in Dollar rates.

The Euro has perhaps been the big winner of the week, gaining 5 cents on the Dollar to break through the 1.3 level. The Euro has also reached record highs against the Pound with talk of parity being achieved as further base rate cuts are expected in the UK. We are seeing much smaller ranges from the European currencies with Zloty only moving between 0.226 and 0.221 against the Pound and the Czech Koruna staying in the vicinity of 0.033.

The Euro begins its second decade on January 1st and many economists are watching with interest the true 'litmus test' of the Euro as deflation appears in the Eurozone. The ECB has less scope than other Central Banks in cutting interest rates and we could see the Euro weaken significantly when the extent of economic contraction in the Eurozone emerges.

Industrial production figures out this morning show Eurozone production has fallen 1.2% on the month for October and 5.3% on the year. The ECB has also revised GDP forecasts down to 0-1% for 2009, from 0.6-1.8%.

At present we are seeing Governments and Central Banks go into overdrive attempting to mitigate the effects of recession for their economies. The impact of figures that speak for themselves has sent the Pound plunging this week, although some analysts are predicting Sterling is approaching the trough of the economic cycle. Low market confidence and falling inflation rates support the case for further rate cuts and this too is a factor in the low value of Sterling.

While underlying trends remain negative, we are now seeing far less volatility than we have witnessed in recent weeks. The time is right for those looking to transfer Euros, or any other currency for that matter, back into Sterling. Speak to your dealer about the best option for your currency requirements.

Have a good weekend!

Nigek Hodges of Currency Solutions