Weekly F/X Comment

It was a very familiar feeling, watching sterling struggle all week. A bit like watching West Brom trying to stay in the Premier League. One step forwards, two steps back. Every game a six-pointer, and you don't win any of them. It's been a very poor week for the old currency, and a better one for the new. So here we are at just under 1.1700 when 1.2000 looked such a realistic bet at the end of last week. So what went wrong this time?

The Gaddafi effect
So why should the tent-dwelling green-book-waving dictator have any more effect than all the other despotic ragtops? (no, it's not racist, it's descriptive). Oil, that's what. It seems that he would rather set a match to the umpteen billion barrels of oil he's perched on than stand aside and let democracy ruin his party. After all, it's not really fair, is it? He's right when he says that Queen Elizabeth has ruled for longer than he, and no one is trying to kick her out of her own country. I do rather think he may be missing the point though.
Oil markets scare easily. The thought of what $200 a barrel oil would do to weak economies, including the UK, was enough to make sterling investors think three or four times, never mind twice.

Mersh un-mellow
Yves Mersch is an ECB henchman, or can be viewed as such in sterling terms. He had the audacity this week to imply that the ECB may be about to harden its views on inflation. In other words the Eurozone may consider raising interest rates earlier than everyone thought they would. The markets took the hint and bought the Euro on the thought of higher rates than sterling.

And when it's not your day
You just know that things aren't going your way when the bank of England come out saying virtually the same thing as the ECB, and the market reacts in the opposite way. The MPC minutes showed that there are now three members of the committee looking for higher UK interest rates to counter inflation. Much the same stance as the ECB you might think, so it should nullify the effect. No, of course not. Sell more sterling, buy Euros.

Remember GDP?
You know, that awful figure for the 4th quarter of 2010? Don't worry, they said, the figure of down 0.5% was only provisional, and it will be revised in February. It has just been revised to down 0.6%


So where does that leave us for the coming week? I have to say I'm running out of logical predictions, or certainly ones that work out to be anywhere near correct. I'm therefore going to abandon perceived logic, and go for a stronger pound by next weekend, if only on the basis that sterling doesn't really deserve to have two bad weeks like this in a row. My forecast is 1.1875 for next Friday evening. fingers crossed!