The pound made inroads to the euro yesterday as the market seemingly readjusted in the belief that the euro is too strong at present. However, risk appetite has started to diminish, due to the uncertainty over liquidity boosting measures from central banks announced last week riding on the back of soft economic data. The Bank of England will auction a total of £11.35bn in two auctions, with the first occurring today. With little economic data out yesterday, investors will look today to the consumer and retail price index data due out at 09.30 GMT. Tomorrow will see the publication of the minutes of the Monetary Policy Committee’s interest rate decision earlier this month.

Sterling eased towards a two and a half month low versus the US dollar yesterday. This was in response to annual house price inflation in England and Wales falling to 4.8 percent in the month of December. It showed asking prices for homes fell by 3.2 percent on the month, the largest monthly fall in the six year history of the Rightmove survey. The weak data supported expectations that the Bank of England will cut rates further in the new year, even though investors are speculating on the possibility of strong inflation data later today. Today’s release of UK inflation data, the Consumer Price Index, at 9:30 GMT will be closely watched, followed by the publication of the minutes of the BoE’s decision to cut interest rates on Wednesday.

The Australian dollar firmed overnight after the central bank stated it would have raised interest rates in December, if it had not been for the credit crunch which has raised the cost of borrowing. The Reserve Bank minutes showed that they will again consider whether past rate rises have been enough to curb inflation, when they next meet in February. However, gains were minimal with softer metal prices and continued investor concerns over risk aversion. Yesterday saw the first real evidence of the credit crunch on an Australian company when Centro's, the second largest commercial property company in the country, share price dropped by over 50 percent in one day. The company had borrowed heavily in credit markets to fund its aggressive expansion in the US.

The New Zealand dollar recovered from recent day’s losses, despite further global stock market losses. Domestic data did little to move the kiwi as it remains vulnerable to volatile equity markets. Investors continue to remain nervous about taking risky positions amid weaker stock markets around the region.