Weekly € rates and comments – week commencing 28th September 2009

Last week got off to a quiet start with the markets waiting for the minutes of the last Bank of England meeting which were released on Wednesday. The minutes contained no surprises. The committee members agreed as one to keep the level of quantitative easing at current levels [£175bn] and there was no mention of reducing the interest rates at which the BoE paid on deposits held with it by the banks. Then Mervyn King the Governor of the Bank of England seemed to indicate he welcomed a weak sterling as it would boost exports. One of the problems with this logic is that it assumes we have things we can export which given the state of UK industry makes me wonder. It also assumes that other countries want to or have the capability to buy our products which given the credit crunch is worldwide may be a wrong assumption. One theory that I have seen for the Governors need to undermine sterling is that it is one of the few controls he has at his disposal to hit the BoE's inflation target of 2% by increasing the cost of imports. This could well be the case but the problem is that once a currency starts to weaken it is very difficult for a central bank to stop the rot. Limited UK economic data out this week. During the week we have some housing data with Augusts mortgage approvals and Septembers house prices surveys from the Halifax and the Nationwide. On Thursday we have the purchasing managers index which is expected to show a slight improvement

 

The euro, which sits at €1.085/£1 inter bank, continues to be flavour of the week/month/year. Business confidence in Germany continued its upward trend albeit slightly below those predicted by the analysts. As Germany is a key driver of the euro zone economy this is positive for the euro zone. This weekend we had the German elections and Chancellor Angela Merkel improved her majority. Some market commentators are predicting the euro to approach parity with sterling by the year end [i.e. €1=£1] whereas some believe sterling to be undervalued against the euro and could be much higher by the year end. However sentiment at this moment in time is with the euro and as such I suspect the upside for sterling is limited with the parity having a higher probability. This week we have euro land unemployment data which is expected to increase to 9.6% but with a slowing rate of increase. The forecast is for 10% by year end. We also have inflation data which is expected to stick at -0.7%. Eurozone consumer confidence is expected to increase slightly but is in negative territory.