The Bank of England Governor, Sir Mervyn King, used his annual Mansion House speech to outline his view that the UK faces at least three more years of economic pain before any sustainable recovery takes hold. He also suggested that the Bank was actively targeting growth levels as well as inflation, suggesting the Bank had been correct in keeping interest rates at historic lows because by raising rates overall output could have been materially worse and hence the economic recovery even weaker. Pessimism by Mr King was partially offset by Chancellor George Osborne who outlined plans by the Government to privatise the “good” part of Northern Rock – which includes customers deposits and loans – and keep the “bad” part including all of the toxic loans made in the period before 2007 on the governments books. The sale is expected to raise around £1 billion for the Treasury, which is a small step in the right direction, but is small fry in comparison to the stakes in the other nationalised banks. Sterling is trading down against both the Dollar and Euro this morning. This is partly due to risk being taken off the table. European Bourses are down across the board and the USD is making major gains in the flight to safety. It is also that UK retail sales have again disappointed – maybe Mr King’s own predictions will be more accurate than the Bank he leads.

Images of rioting in Greece helped Sterling gain versus the Euro yesterday afternoon, but in the grand scheme of market movements, this current drift higher is almost like the market ignoring the ongoing Greek saga. The restructuring of debt or default by the Hellenic republic is, if not fully, at least partially priced into the Euro. The prospect of further rate hikes and the long term trend away from the US Dollar is keeping the Euro strong against both the Dollar and Sterling. Euro-zone CPI is due at 10am this morning, with the Euro at such elevated levels we can probably expect the number to be at or below market expectations, and this may lead to further Euro selling given the current strength of the USD.

The markets in America look set to open lower, and as such we can expect the USD to hold onto its gains thus far. With the lack of any substantive market moving data until tomorrow with the University of Michigan confidence survey in the afternoon it will be up to other markets to turn the current trend around.

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