F/X weekly comment

Interesting. Very interesting. But stupid. I'm sure I can picture that sketch from Rowan and Martin's laugh-In in the 70s, or was it the late 60s? It is such an apt comment for this week's machinations in the foreign exchange market.

Euro highs
The euro has had a very good week, at one point reaching a 4 month high (that's a low exchange rate to you and me). This is all despite the Portuguese government falling apart over an austerity vote; a general election likely and ratings downgrades by Fitch and S&P. Add to this Moody's decision to cut the ratings of 30 Spanish banks and the news that Irish GDP fell by 1.3% in Q4 you have to wonder what the hell is going on in Euroland. What are they on? And can I have a couple of litres of it please? The simple answer is continued bullishness over possible interest rate increases in the Eurozone. Trichet and his crew seem determined to increase interest rates even while the PIGS are teetering on the brink.

Sterling lows
Sterling was also the architect to its downfall with a poor retail sales figure for February. It looks like high st UK brought forward high ticket spending beat the 2.5 percentage point increase in VAT while still being fearful of unemployment and the government’s austerity measures. The backlash is that there was no money le4ft to spend in February. Even Sainsbury’s posted poor results and if they are feeling the pinch then the smaller family stores and independent retailers are bound to be in a worse position.
If inflation stays high, as predicted in the budget, we are going to see these companies increase prices, further pressurising sales in rest of the year. This sends a powerful message to Mervyn's gang that while inflation is high, the state of growth in consumer spending, business lending, and the housing market is too perilous for an interest rate rise anytime soon. This is not good news for sterling, as we have seen this week.

A brighter outlook?
What? Am I mad? Quite possibly, but my point is that the only thing that moves any market is supply and demand. Yes, that can be swayed, or even panicked by sentiment, but logic rarely plays much of a part. The stronger a logical case you can make for sterling going down the pan, the less likely it is to do so.
Sterling is just too low. I'm not saying it won't go a bit lower, but it must come back (don't quote me).
Back to the 1,1500s for me, by the end of next week.