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Merde, and lots of it.  Flying in all directions.  Wednesday was not a good day for sterling, and the only reason it's recovered a little is that the rest of the week was pretty miserable for the euro.  We've ended up (in fact well down) at 1.1730 after last week's flirtation with the 1.2000's.  This is what happened.

The CBI

Even before Wednesday's fun and games, the CBI got in the act by predicting that the UK's economy will recover more slowly than previously thought next year. It expects GDP to grow by 2% in 2011, not 2.5% as forecast in June this year. Spending cuts outlined in the austerity package are to blame, apparently.  The news  pushed the pound lower. The austerity package is proving to be a bit of a mixed bag as far as sterling's fortunes are concerned. On the one hand, the cuts have meant growth forecasts have been cut, and on the other hand the cuts have meant the UK has retained its AAA credit rating, which has helped support the pound.

The BoE

Step up to the plate Merv, this is your big day, but whatever you do don't mention QE.  Oh dear...

Minutes of the Monetary Policy Committee's meeting to hold rates earlier this month showed an 8 to 1 vote for leaving interest rates on hold at a record low of 0.5 percent, as widely expected, but then came the crunch.  Some of the committee members went on record as saying that there was a possibility that more Quantitative Easing would be needed to bolster the economy.  The pound soon crashed into the 1.1600's before staging a weak recovery back towards the 1.17 level.

Euro to the rescue

True to form, the euro was determined not to hold on to its gains.  A survey of purchasing managers showed growth in the euro zone slowed in September while the PIGS'  bond yield spreads widened against their German counterparts. Then on Thursday came the news  that the Irish economy became the first economy to slip into a double-dip recession as its second quarter  growth figures were released at -1.2% against a previous of +2.7%. That is really horrible, and rumours, which better be false, of an Irish bank defaulting on its debt didn't help matters at all.

The combination of these revelations and the poor PMI figures from the rest of Europe that showed that growth is slowing across the European manufacturing and services sectors led to the euro losing ground against most currencies, and sterling was once again let off the hook.

What now?

Well what a messy week that was, but just in case you hadn't noticed, we are now exactly where I forecast we would be.   I see more problems for sterling this week, and I wouldn't be surprised to see the pound in the 1.1600s in a week's time.