F/X weekly comment

I think it was obvious from my final comment last week that I was doubtful whether sterling would be able to consolidate at the 1.16 level. It is no surprise to me that we find ourselves down at the 1.1450 level at the start of this week. So what went wrong this time?

Same old sterling (reprise)
There was enough data last week to support any negative outlook for the UK economy. The RICS Housing Survey showed that 23 percent more surveyors recorded falling rather than rising prices in August, while the UK house price index dropped 1.5 percent in July. Retail sales shrank 0.2% in August, and inflation continued its upward march, increasing to 4.5% in August. Goodness knows what the real rate is by the way.
Osborne and Clegg wittered on about the possibility of increasing the monetary stimulus (QE/Printing Money) to support the economy. Adam Posen, one of Merv's merry men, said the BoE should purchase as much as £100 billion in securities over the next three months. Currently the program stands at £200 billion.
Not one bit of any of this news is designed to give sterling any help at all.

Euro tottering?
All this of course is happening against the backdrop of the Euro under severe pressure of its own. Greece is teetering (different from tottering) on the brink of default, and no-one can really predict what the outcome of that would be, other than an almighty mess. Portugal, Spain, Ireland and Italy watch with interest, with maybe a touch of blind panic mixed in.

Some respite for the Euro came with a move by the central banks of the USA, UK, Japan and Switzerland, and also the ECB, to provide additional lending facilities, and this will help counter fears about the exposure of banks in the EU to eurozone sovereign debt. The debt problems had made the banks reluctant to lend and this in turn has created funding problems.

There was also further help for the Euro after European Commission President Jose Manuel Barroso said Euro bonds could be introduced. This would effectively share out Greece's (and other problem country's) debt, with sovereign bonds being replaced by pan-European bonds. Needless to say, The Germans aren't keen.


What next?

It is becoming increasingly obvious (even to me) that sterling is at present incapable of taking decisive advantage m the Euro's woeful position. With all the problems the Euro has, sterling should be looking down from the lofty heights of 1.50, not struggling to stay over 1.10 with occasional forays up to the 1.20 area. So for the time being we are going to have to get used to it. Unless the Euro falls over completely, these levels are going to be with us for some time yet.

It will be interesting this week to monitor the data due for release. In the eurozone, we get the first look at sentiment and activity surveys for September with the German ZEW (Centre for European Economic Research - work that one out) expectations index and eurozone PMIs due for release. All are expected to slip further, confirming once again that the European economy has lost considerable momentum since the beginning of the year. A poor set of numbers could further fuel talk that the ECB may be forced to reverse the rate hikes implemented earlier in the year. Markets will also be watching comments from the Merv's mate Clude Trichet who is due to speak on Friday.

In the UK, the highlight of the week will undoubtedly be Wednesday’s release of the minutes of the September BoE policy meeting.

Net result? 1.1375 for me. A bit boring really. We shall see...