A strange week for sterling last week. You would have thought that sterling would gain against the US$ as the investment bank that had to be saved ten days ago was American. No, the markets seemed to take the view that as the UK was so dependent on the financial sector and the pre-eminent position of the City that any financial hardship anywhere was negative for sterling. We then had the City rumour mill in full flow as to financial stability of HBOS which was proved to be nonsense but again had a negative drag on sterling. Against this UK retail sales for February which were announced on Thursday were better than expected which has acted as a short term fillip. I am sure markets will be volatile for the next few weeks.
The € which sits at €1.284/£1 inter bank is viewed as a safe haven currency and continued last week to set new highs against sterling and the US$. However a key feature of the € has been the view of the market that holding it acted as an anti inflationary counter. The reason for this is that energy and commodity costs are priced in US$'s and as there cost went up the € would strengthen and counter any additional cost of buying the commodity hence reducing inflation. However this week commodity prices have suffered a reversal and as such this "feature of support" for the € may become less significant.
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