F/X weekly comment

And proved wrong I certainly was!
As I write this sterling is sitting close to the dizzy heights of 1.1600 (OK, 1.1580). So what has caused all this merriment?

Same old sterling
Not a sterling show of strength, that's for sure. Interest rates were held again at 0.5%, which was such a racing certainty that you couldn't have got a price on it. UK PMI service sector figures showed the biggest fall in ten years, proof if needed that the UK economy is not responding as hoped. Indeed George Osborne was forced to admit in a speech this week that hope of an imminent economic recovery had been scaled back. All this keeps the markets eye on another potential tranche of QE (money printing), which is quite rightly negative for sterling.

However QE wasn't mentioned at all at the BoE meeting on Thursday, and the markets liked that, and it proved to be a spark that was followed by a very adjacent piece of blue touchpaper.


Euro reality
Amazingly, to my mind anyway, the ECB after meeting speech by Jean-Claude Trichet was factual, downbeat, and downright gloomy for the Euro. Perhaps he just wasn't up to applying gloss paint to rotten wood anymore. Trichet announced that no change would be made to the Euro rate, no surprise there, but then went on to highlight 'downside risks to economic growth in the Eurozone'.
This is remarkable not just because it is true, but because it is in effect an admission that the central bank were probably wildly optimistic in their timing when they started to raise Euro interest rates. If you remember, it was blindingly obvious at the time that sterling rates could not go up. The market has now decided that future rate rises have been pushed much further back in time, and some are even suggesting that the next rate movement for the Euro may be down.
During Thursday afternoon the rate moved from the low 1.1300s to over 1.15, and on Friday the onslaught continued and the Euro weakened further, in fact it has just made up those twenty points and is now at 1.16.

This week?
Aha, a note of caution is necessary here. Next week we have a whole raft of UK economic data, and precious little to come from the Eurozone. We will see UK data for house prices, inflation, unemployment and August retail sales. That is four chances to score an own goal, so I am pessimistic about our chances of keeping the momentum going. There is just a chance though that the Euro may be holed below the waterline.

On balance, I'd love to see sterling establish a base at 1.16 but somehow....