Reports today suggest FX analysts are the most pessimistic on the Pound since May 2009, predicting the Chancellor’s cuts will eat into economic growth.

The already soft economic recovery is forecast to slow causing Sterling to fall back against both the Dollar and Euro.

Median estimates suggest the Pound will drop 8 per cent against the Euro by year end as the recent bullish UK data starts to deteriorate.

The US Dollar rose sharply on Friday against the Euro, Sterling and the Australian and Canadian Dollars on the back of risk aversion, while safe haven currencies such as the Swiss Franc and Yen strengthened against the Dollar.

The Fed is perceived by the markets to be in a holding pattern until further directional economic data is released.

Weakness in global equities carried through to European markets sending major indices lower while US stocks are lower as the sell off continued. The current lack of Tier 1 economic data out of the US is putting the focus on the equity markets.

The Euro fell against a basket of currencies on Friday and remains on the defensive this morning as comments by a senior ECB official fuelled expectations for liquidity to remain a concern for the single currency.

ECB Governing Council member Axel Weber told Bloomberg in an interview published on Friday it would be “wise” to extend unlimited liquidity to banks past the end of 2010. The Euro was further hit after the US Federal Reserve said the US and global economic recovery was losing steam, striking a nerve with investors.

The Eurozone is seeing an increasing split not only in banking but in the economy in general. While the Eurozone economy improved in the second quarter with Germany setting the tone, southern Europe recorded much more muted growth.

Market analysts believe the ECB may have little option but to keep flooding the money market with cash to help banks and governments in the EU.

The Eurozone economy will remain under the spotlight today with the release of the flash August Eurozone PMI’s which are expected to fall back from 56.7 in July to 55.5.

In the US the focus will be on the release of housing and labour market figures. On Friday of this week the focus will be on the UK with the release of Q2 GDP growth figures.

Article written by currenciesdirect.

None of the above information constitutes, nor should be construed as financial advice.