F/X weekly comment

Still waiting for that move through to 1.2125. The budget came and went this week and George Osborne emerged unscathed, if accused of being a grannie-mugger. We've ended up, or rather down, at 1.1960, which is a bit disappointing really. And it could all have been so different:


The best laid plans

Negative numbers were the order of the week, with a very weak set of German PMI figures, which suggested that the eurozone’s leading economy is beginning to struggle in response to pan European debt worries. Problems for the Euro were reinforced by Irish growth figures which showed that the Republic’s economy had contracted by 0.2% in the three months to the end of December 2011. That set the scene for a fun Friday. If the Italian Retails Sales numbers showed that the country’s self-imposed austerity measures are beginning to weigh down the country’s economy, then a weaker the Euro would be the result, sending the pound back toward its 18-month high of 1.2168.


Go astray

So it came as no surprise to me when Italian retail sales rose in January contrary to market expectations, and despite a struggling economy and increasingly tight fiscal policy. Retail sales rose 0.7% from December in seasonally-adjusted terms, led by a 1.2% monthly jump in food purchases.

Economists had expected Italian retail sales to be flat in January after falling in November and December. The jump in January's retail sales was the strongest in at least two years and may signal pent-up demand, especially as the shops offered steep post-Christmas discounts this year. If I had been a jobbing F/X trader looking to boost my weekly P&L on the back of this scenario, I'd have been having a quiet weep by now.

Just to rub salt into the wound, French business confidence in manufacturing also rose in March. The index increased to 96 in March from 93 in February, as the outlook of business leaders improved. A figure of 93 had been expected. An overall sentiment reading, including construction, retail, services, and wholesale, also rose in March to 95 from 91 in February, just to put the boot in.

Nearer to home

The underlying reason for the fall back into the 1.19's was our old friend Merv and his MPC cronies. The latest policy minutes showed that committee members Posen and Miles pushed for more QE to help stimulate the economy. Most sane observers in the market had expected a unanimous vote for asset purchases to be left on hold following the February decision to increase the scheme by 50 billion pounds to 325 billion. This of course put sterling under pressure.

On the same day The Office for Budget Responsibility's forecasts for growth and borrowing detailed by Osborne were marginally more optimistic than the previous estimates, but the earlier release of much higher-than-expected public sector borrowing for February pulled the pound down. Any future deterioration in the borrowing figures may well mean that ratings agencies Fitch and Moody's will downgrade the UK's AAA sovereign debt status, another potential source of weakness for pound. Ho hum....




What now?


I'll stick again to last week's forecast of 1.2125. Not that I have any real idea where we're going to be next week. Call it blind faith.