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Weekly Euro Currency forecast from France Financial

What a frustrating market this is!  As soon as I can see a discernable trend that makes sense and fits in with my General Theory of Rates activity, the whole direction changes and we end up back at square one, or in this case 1.2100 or thereabouts.  Don't ever let anyone tell you that making money out of foreign exchange is easy.  Losing money is easy.

So what happened?

Basically, a mysterious 'improvement in sentiment' coupled with an increase in Halifax house prices and problems for the euro were what happened.  I think dealers use that phrase to account for price movements that they don't understand.  It really means 'people bought sterling when we thought they should be selling it’.  This turned into a painful experience for many desk-bound F/X traders, a group to which I thankfully no longer belong   The pound rallied close to the 1.22 level against the euro at one point, before a dose of reality saw it fall back to these levels.  

I really am surprised that we saw such a move caused by  one housing market indicator, which leads me to believe that this spike is temporary and not a trend change.  One good piece of data from the housing market does not constitute a recovery, and other factors such as mortgage approvals and surveys from other major lenders (Nationwide for example) must be taken into account.  It is more than likely that this house price data was a statistical aberration.

And surprise, surprise, the Bank of England decided to keep rates on hold at 0.5%.  There is a growing market view that interest rates will not begin to rise again until the second quarter of 2011, and more Quantitative Easing (printing money) may be needed to stimulate the economy if Osborne's austerity package slows the pace of recovery even more later this year.  None of this, of course, should be good for the pound.

PIGS back in the news...

Portugal is the P in PIGS, and there were further euro wobbles yesterday as a Portuguese state auction of bonds came under focus.  This is basically the Portuguese government borrowing money to finance its debts.  While there were plenty of lenders, the yield (the rate of interest the Portuguese have to pay) rose to a painful 5.92%.  This is up from the 4.2% at the previous auction and shows that while investors are willing to back these peripheral countries it shows that they are needing more and more persuasion to do so.  This has the inevitable effect of raising doubts about the health of the euro, so we go back to the rather boring game of seeing which currency can under perform the most.

What now?

I'm going to stick to my game plan here.  I think sterling will weaken more than the euro in the short term, and then the euro will come under more pressure after Christmas.  I'm still looking for 1.1800 or lower over the next few weeks, but please don't quote me.

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.

Get more details about Rob Hesketh, France Financial and Spectrum IFA Group

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