Weekly F/X comment

Well, we obviously didn't cross our fingers for long enough, did we? Whichever way you look at it, 1.1630 doesn't look much like 1.1875 so chalk this week down as another 'miss'. So let's roll out the things that we didn't anticipate this week...

ECB and Interest Rates
ECB President Jean-Claude Trichet said euro zone rates could rise sooner than expected in a press conference on Thursday. OK, he didn't actually say that, but an upgrade to European growth prospects twinned with a call for 'strong vigilance' towards price pressures said it for him. Trichet's speech is always closely monitored for coded references to interest rate changes, and the market seized on the 'strong vigilance' line as it has in the past been used as a precursor to a rate rise within two months. Just to make things blatantly obvious in this secretive world, the final statement omitted the line referring to current rates being appropriate.
UK Economy
UK house prices fell 0.9% in February, and worries about the economic recovery are likely to keep prices under pressure this year. This drop was twice as big as forecast by analysts, and most economists reckon house prices will dip this year by between 2% and 3%.
Just to add to Sterling's woes, it was hurt by a poor services PMI figure on Friday. While there have been increases for the construction and manufacturing sector in the past few months the services sector, which makes up 70% of the UK economy, fell back in February. This is a reflection of the lack of lack of consumer confidence that is causing the people in the street to not spend money. This is a blow to the government and will dampen hopes of a near term interest rate increase from the Bank of England.
A question of balance
Things are starting to get interesting (no pun intended) on the interest rate front. Sterling has been supported for a couple of months now by expectations of a rate hike, and now it looks as though the Euro may beat us to it. That in my view is unlikely though. I can see both central banks moving at the same time in May, but that won't give sterling any impetus against the Euro.
Where sterling may gain is after the rate hike. It will be interesting to see how the market reacts to a Euro rate hike when, quite frankly, that is the last thing the PIGS need. The Euro could then come under renewed pressure, and we could then see sterling mount another charge on the 1.2000 level.
Until that happens (or doesn't happen) it will be difficult for sterling to make much headway, so I don't have any high hopes for much change by next week. 1.1700 is my forecast.