The dollar surged sharply against the sterling and the euro, rallying to its highest level since June 2001 versus the pound at 1.3860 and to 1.2855 against the euro. The key highlight of the US session was the inauguration of President Obama, which had little impact on the currency market.

Pound Plunges

The sterling tumbled to its lowest level since 2001 at 1.3860 against the greenback. Fears over the stability of the UK banking system prompted a sell-off in the sterling as news of another bank bail-out hit the wires, with the government announcing plans to boost its stake in RBS.

Separately, BoE Governor King expects Q4 GDP to have declined sharply, with a marked contraction likely for the first half of 2009. He says there's still a risk for inflation to undershoot target in spite of recent big rate cuts.

We expect the pound to remain under pressure in the coming sessions, with additional reports likely to signal further deterioration in the economy.

Loonie Slumps on BoC Cut

The Bank of Canada cut its benchmark interest rate by 50-basis points to a record low at 1% earlier in the session, prompting sellers to dump the Canadian dollar to a new one-month low at 1.2694. In the accompanying policy statement, the BoC offered a dire assessment of the economy, acknowledging that Canada's economy was already in recession. It said that Canadian exports have fallen dramatically and domestic demand was slumping due to declines in real income, household wealth and confidence. The BoC expects the economy to continue to contract, anticipating a 1.2% decline in real GDP for 2009. The Bank also hinted at the possibility for further easing, saying it will continue to monitor carefully economic and financial developments in judging to what extent further monetary stimulus will be required to achieve the 2% target over the medium term.

The Loonie fell to its lowest level in a month just shy of the 1.27-level. Resistance is seen at 1.2740, followed by 1.2770 and 1.28. Subsequent ceilings are eyed at 1.2830, backed by 1.2860 and 1.29. On the downside, support begins at 1.2650, followed by 1.26 and 1.2540. Additional floors are eyed at 1.25, backed by 1.2470 and 1.2440.