FX Comment and Forecast

FRANCE FINANCIALS WEEKLY F/X COMMENT

Last week I was hoping that sterling would start to make some headway against the euro. A week later we are precisely where we started, at 1.1190. After a good start to the week, which saw sterling reach a 3 month high against the euro, it fell back sharply in midweek, scuppered by two major events. Firstly the S&P ratings agency said Britain, due to its huge levels of government debt which we've talked about here before, was the major economy most at risk of losing its triple-A rating. This hurt the pound, as investors and speculative traders often sell Sterling on any suggestion Britain may lose its top-notch rating. The second culprit was our friend Mervyn King, who said the Bank of England was open-minded about pumping more money into the economy and highlighted the benefits of a weak pound.

So, despite good recovery for the pound over the last 4 weeks, this week shows that Sterling is still very fragile and any negative news can quickly affect exchange rates. As unemployment is up, and the governor of the BoE warning that the government have no plan at all to repay the huge levels of government debt, the outlook is still poor. Couple this with the fact that interest rates are likely to remain low for some time, we are unlikely to see any significant recovery for the pound in a hurry. That said, I still feel that the overall trend is up. We’ll just need to overcome a few hurdles on the way.

AND NOW… THE FORECAST

My forecasts will reflect my personal views, and certainly not those of the Spectrum IFA Group. My ongoing view is still that sterling is undervalued below 1.2500 Euros.
Having ended the week all square, I am hopeful that sterling can resume its upward track against the Euro. There are important announcements due this week, which could well affect sterling. The minutes of the November MPC meeting feature in the UK and should provide further background in terms of the central bank's decision to extend its QE activities. On the data front, it is also a pretty key week with consumer prices, retail sales, public sector borrowing, Rightmove house prices and the CBI’s latest industrial trends survey all due for release.

If all goes well, and let’s face it, that is unlikely, I hope to see sterling in the 1.1300s next week.