Latest on Sterling and the Euro by Charles Purdy

A strange period for sterling last week. You would have thought that sterling would gain against the US$, especially as the investment bank that had to be saved ten days ago was American. But no, the markets seemed to take the view that, as the UK was so dependent on the financial sector, any financial hardship anywhere was negative for sterling.

We then had the City rumour mill in full flow as to financial stability of HBOS. This was proved to be nonsense but again it had a negative drag on sterling. Against this UK retail sales for February, 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 and it is difficult to see any upside for sterling right now.

The € (which sits at €1.284/£1 inter bank) is viewed as a safe haven currency and last week continued to set new highs against sterling and the US$. However, a key feature of the € has been the market's view that holding it acted as an anti inflationary counter. The reason for this is that energy and commodity costs are priced in US$’s and, as their cost went up, the € would strengthen and counter any additional cost of buying the commodity hence reducing inflation. However, towards the end of last week, commodity prices suffered a reversal and this “feature of support” for the € may become less significant.

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