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Weekly Euro currency forecast from France Financials IFA

Well, my forecast for this week was 1.1900 and we did in fact get up into the high 18's during the week, but fell back a little to finish at 1.1780 ish.  Spain became the latest country to pass austerity measures but only just. The Spanish parliament  passed the measures by just by one  vote as they  clashed over plans to reform the banks,  ease labour markets and cut pension provisions.

Politics came back into focus for the pound this weekend as David Laws fell on his sword  (he had hardly finished sharpening it)   over disclosures that he rented a 'second bedroom' from his lover.  This is obviously a complete waste of a room, and he should definitely go on that basis alone.

Sterling also found an unlikely benefactor this week in the form of the Pru.  In March, when the takeover bid for AIA was announced, the pound fell massively against the US Dollar as the firm took up USD positions. These positions are now being reversed due to shareholder revolt about the deal, and the big demand for the pound by the firm meant it strengthened and boosted rates. Sterling gained on expectations the UK firm would need to unwind previous dollar purchases. As I've explained before, supply and demand is a huge driver for exchange rates, and the demand for GBP has pushed up its value.

However, later in the day the firm said it was indeed pushing ahead with the deal - that's why the pound retreated later in the week.

China also helped calm concern in the markets that it was avoiding Eurozone assets due to the ongoing sovereign debt crisis. A Chinese government official gave assurances that China remains committed to its long-standing goal of diversifying its foreign exchange reserves. The head of China's $300bn sovereign wealth fund said that the debt crisis will not have an impact on overseas investments.

This helped to calm risk aversion in financial markets and allowed equities to push higher, though analysts said sentiment remained fragile. The pound is seen as a risky asset due to our financial problems, and so both Sterling and the Euro pushed higher on the back of the comments.

Where now for the pound?

It's impossible to predict given the uncertainty surrounding the markets at the moment. The market is being driven by sentiment, and by debt problems worldwide. The Eurozone government debt worries are outweighing concerns about the UK and there is more upside for sterling, at least in the near term. The EU crisis won't be affecting the markets like this forever, and once austerity measures are agreed, and the finance chiefs of the EU countries have a robust plan to reduce the debt, focus will probably shift back towards the UK's poor fiscal position.

So, for now, make hay while the sun shines.  We could still see the magic 1.2000 level soon.

A bientot,   Rob

Rob Hesketh and France Financial

Rob moved to France in 2003 after working for 30 years in International Banking in the City of London and Brussels.  He joined the Spectrum IFA Group in 2005 and became registered and authorised by the French fiscal authorities in mid 2006.  He is now a partner in Spectrum and looks after client relationships in the South West of France.

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