F/X weekly comment

Even mildly observant readers of this column may have noticed a pattern starting to emerge recently. I forecast that sterling will go up; it goes down. I forecast it will remain level; it goes down. I forecast it will go down; it goes down. Last week I forecast that sterling would tread water in the 1.1600 range, and where is it now? 1.1450, that's where.
It's not even as though much happened this week. Chernobyl MK11 is unfolding before our very eyes; another oil war, this time in Libya (why can't we pick a fight somewhere where our equipment won't clog up with sand?). And of course a currency crisis in Japan, where the very last thing they need at the moment is a strong currency.

Confidence

Unsurprisingly, the British public seems somewhat lacking in this useful commodity recently. The Nationwide Building Society's consumer confidence index fell to 38 last month, its lowest since the survey began in May 2004, following on from another sharp drop to 48 in January. The record fall was driven by a steep decline in the index that measures consumers' expectations for the British economy in six months. That fell to 50 in February, from 64 in January. The spending component, the section which gauges people's appetite for buying household goods and other major purchases, tumbled even further, down 18 points to 52 from 70.
The gloomy survey highlights the dilemma facing Mervin King and his team as they debate when to raise rates from a record low of 0.5 pc to try to curb inflation now running at 4.2 pc, more than double its target. They have to balance the need for an interest rate hike to fight inflation with the need to protect and encourage growth. Add to this the uncertainty about the global economic outlook in the wake of last week's earthquake and tsunami in Japan, and the result is that expectations of a UK interest rate rise in May are looking less and less likely to come to fruition. A more likely date is now deemed to be August.

Timing

The problem with a UK interest rate rise in August is that it is likely to be preceded by a Euro rate hike , possibly in May. If this happens sterling will fall further against the Euro, as yet another reason to buy the pound disappears.

Onwards and downwards

Moving forwards I think it likely that sterling will remain weak due to the uncertainty in the world at present. Problems in Libya will now escalate, and this is likely to have an impact on oil prices and also investors will continue to move away from riskier currencies such as the pound.
Highlighting concerns about the economy, the OECD cut its 2011 growth forecast for the UK this week, saying that we face significant risks from falling house prices, weak domestic consumption and uncertain global demand. Also yesterday figures showed that UK unemployment is at its highest since 1994. The combined bad economic news for the UK weakened the pound and pushed exchange rates lower against all major currencies.


So where to this week?
Let's go with the flow. Flow only goes one way. Down. I can't see any good news around at the moment. I think we will test 1.1400 early in the week, and if it doesn't hold, we could be looking at the 1.12s before very long.