Weekly F/X comment

Pretty much a stalemate at the end of this week, where we ended up at 1.1830. That feels like quite a result for me compared to recent drubbings in the forecasting stakes. It also gives me a chance to leave my chips on the table from last week, and continue to look for renewed sterling strength in the coming weeks. A one of my friends and readers pointed out during the week, if I really wanted sterling to go up, I'd forecast a collapse. The risk is of course that I'd be right for once!

Still back on track?
I still feel better about sterling this week. The fall down into the 1.16's was a serious reversal, but I'm still looking for those reasons to be cheerful. There are more and more observers in the market that are starting to look for sterling, and indeed European, interest rate rises. The betting is that the BOE will move first. Traditionally the ECB, having picked up the habit from the Bundesbank, hate to be trendsetters. The fact that the rates did not go up this week hurt sterling initially, but that was just because speculators had factored in a 20% chance of a UK rate hike, and when it didn't happen, they sold their short term sterling holdings, making the rate dip.

Egyptian Pound
Can it be a coincidence that the Egyptian currency is the pound? Of course the relevance is zero, but it is interesting that the crisis in Egypt has been helping the Euro crisis currencies go about their business relatively unnoticed for the last couple of weeks, and the PIGS have been able to quietly sort themselves out away from the market's full glare. That was until Thursday, when a Portuguese bond auction needed intervention from the ECB to prevent yields hitting double digits. This upset the Euro investor market and helped the pound regain its losses after the interest rate decision.
On Friday sterling received more support when the PPI input data, which measures the change in the price of goods and raw materials purchased by manufacturers, indicated further inflation worries by coming out much stronger than expected. Next week could be choppy on the figures front with Tuesday’s CPI and then the biggie, the BOE inflation report on Wednesday.

Why a rate rise?
Raising rates takes demand out of the economy and slows down inflation. Higher rates also strengthen the pound due to the higher yield for investors. Unfortunately there is also a downside. It also increases the cost of borrowing and could bring with it a dip back into recession, especially when taken in tandem with the austerity package. My money is on a UK rate rise in May, with speculation before then adding to sterling's attraction.
So, as I said at the start, I'm keeping my chips on the table. Early 1.2000s for me by next week.


A bientot, Rob