F/X Weekly Comment

A very familiar theme emerged this week. More of the 'After you Mervyn. No no, after you Claude.' Sterling once again managed to regress when faced with the likelihood of progression against the Euro, and instead of pressing on towards the 1.1600 level as I had hoped, it bounced around all over the place and we finished up at 1.1420.

Euro woes
Let's not think for a minute that the Euro is off the hook here. When European Commission President Jose Barroso warns that financial markets are not convinced that Eurozone governments are prepared to take necessary action to defend the stability of the Eurozone, you should know wthat you have a problem on your hands. Barroso went on to say that the Eurozone crisis is no longer confined to the peripheral states. Too right it's not. Italy's Berlusconi was forced to announce another austerity package yesterday amounting to €62 bn, and even our own M. Sarkozy called back all his ministers from holifay this week and gave them ten days to come up with more cost saving measures. That should be fun. At one stage France looked set to lose its AAA rated status, and may well yet do so. Germany is now the only European country that has truly sovereign debt, that is IOUs that are worth the paper they're printed on. Do we really believe that France can afford to make additional contributions to the potential bailout packages for Spain and Italy?
Yet still the Euro juggernaut rumbles on, although the wheels are looking a little loose.

Sterling woes
OK, so where shall I start? How about a bit of civil unrest? We smirked at the (mini) riots in Greece when the austerity packages were announced. 'There you are you see. Unruly lot. Can't take the heat'. Well there was a lot of heat kicking around our major city centres this week, and the currency markets took note. Mindless moronic thugs out to loot whatever they could get their hand son, or a cry for social justice from an underprivileged underclass? I know what version I believe, but whichever side you take, it doesn't look good to the outside world.
While all this was going on night after night, Mervyn stuck the boot in with the latest Bank of England Quarterly Inflation report, which saw a downward revision of growth for 2012 to 2.% (from 2.5%) and for 2011 to 1.5% (from 1.8%). These downgrades keep on coming, so how low will they get? He also added that the 'headwinds are getting stronger' and 'the mood in markets has taken a sharp turn for the worse'.
Cheer up though, we are doing rather well at the cricket...




What now?
What a good question. I sometimes ask myself why I keep on asking it. In truth I suspect that the answer lies in the timing. Which currency will weaken soonest? A couple of high powered forecasters are suggesting that sterling will be down at 1.0500 well before Christmas. Personally, I don't see it. It might have merit on Sterling's performance alone, but I can't see that it takes into account the fragility of the Euro. Don't hold off from dealing just because of my view though (in fact NEVER do that). The near term outlook is getting very confused. Longer term I'm still very bullish for Sterling, but we have to start seeing some decent signs of economic recovery, and they're not there yet.
Pushed for a price next week, I'd say 1.1350.