F/X Weekly comment

Another fascinating week in the F/X markets, with my forecast of 1.1800 falling quite a way short of the mark as we saw the pound burst through the 1.1940 level at one point on Thursday. At least I managed to get the direction right! The week ended at 1.1910, leaving many licking their lips in anticipation of the magic 1.20 level. More about that later.


The Hangover

David Cameron’s, that is. It must have been hugely dispiriting to arrive back home to a hero’s welcome on his trusty steed to find that all his new lackeys are the same bunch that he’s been trying to ignore for years, those embarrassing Eurosceptics. And worse still, his new best mate Nick disappears off in a sulk, only to reappear later in the week, all guns blazing, letting anyone who cares to listen (including Sarko) what he thinks about this new wave of scepticism and xenophobia.


Fact and Fiction

Fact: The Euro is still in trouble. The currency has accurately reflected this over the past week. The achievements of last weekend’s summit fell way short of solving any of the problems. Indeed it probably created more to worry about. The markets like to see action, not words, and they haven’t seen any yet. The new treaty being entered into by the group of 26 is already starting to show some cracks, with Hungary and the Czech Republic wavering yet again (they already changed their minds once). Nothing is to be announced on this new treaty before March, but the ECB is making it quite clear that they do not want to be promoted to the position of lender of last resort to the European basket cases. On top of this, Angela Merkel is facing growing pressures on the home front. She too is in a coalition, and that may have been the reason behind a conciliatory phone call to DC this week.

Fiction: Sterling is ideally placed to take advantage of this and surge back up towards the levels we used to enjoy up to 2007. Far from it. We have a lot of problems to deal with in the UK economy. I’m writing this during a Christmas visit back to the UK, and can see at first hand what is happening to UK high streets. I’m in a smallish town in Lincolnshire, and at least half of the stores are either boarded up or let on short term contracts to ‘pile it high and sell it cheap’ outlets. UK unemployment is at its highest level for 17 years, and the public deficit is proving to be much more stubborn than George Osborne must have hoped for.


Don’t be greedy

That 1.20 level could easily be a step too far for now. The big boys, international speculators and multinational corporations, are in front of the queue for the best deals in the market. For the likes of you or I to get to buy Euros at 1.20 the rate will probably reed to get to at least 1.21, possibly higher. If the market professionals decide that 1.20 is where they all want to but Euros, or more accurately sell sterling, it will all be done when the rate is at 1.2005, and if there is enough selling of sterling at that level the next stage will see us back at 1.16 or even lower. The best advice I can offer you if you need to convert sterling to Euro is do it early, and be happy with say 1.1850 or 1.19. If you are what I call ‘mini speculators’, and have money in the UK that you will eventually need to convert, you can take a longer term view, but be prepared to be disappointed.


Hols

Any F/X trader worth his salt will have started his holiday break by now, and the markets traditionally stagnate over this period. With this in mind I’m going to take a break this week, and will return to action to launch the New Year. Between now and then please have a great time, and try to forget about politics and economics, as I certainly will!