Sterling takes a Pounding.

All is not well on the financial front line.  Last week we saw sterling break through fresh barriers and reach historic new lows against the euro as well as faring poorly against the greenback. We appear to be well and truly on the ropes. To add insult to injury, over the weekend Yvette Cooper, Chief Secretary to the Treasury, publicly stated that the Government will not support the pound.  After the catastrophic consequences of previous attempts to fix the sterling (such as the Exchange Rate Mechanism!) it appears this is the most sensible course of actions.

Last week was a quiet week for sterling data so what drove the downward trend?  As we say so often ‘the trend is your friend’ and it is important to clarify that whilst sterling performance against the Euro was atrocious it was less heavily sold off against the Greenback.  We feel that general sentiment drove sterling lower with markets looking to the ailing housing sector and lack of confidence on the High Street as the main argument that moved the pound south.  Obviously, the news of failure of veteran High Street retailer Woolworths had no positive effect on confidence, to say the least.

Elsewhere, The US has been rocked by the failure of the Automaker Bailout due to be passed by the Senate last Thursday.  With two of the automakers saying they will not last the year without Federal aid, the focus is now whether they receive emergency loans or seek bankruptcy protections.  We also awoke yesterday morning to hear the beginning of the fallout from Bernard Madoff Fraud Scandal.  Regarding Monday’s FOMC meeting, we believe that some of this discussion will revolve around whether and how to formalize the shift in the emphasis of monetary policy from achieving a target Fed Funds rate to intervening in credit markets and engaging in quantitative easing. This adds an element of uncertainty to the statement that accompanies the rate decision on Tuesday; we expect the FOMC to lower the target rate 50bps and look for the accompanying statement to note the worsening in the data and in the economic outlook, and to continue to emphasize the fading of inflation risks.

Finally, regarding the euro, the German IFO index released last week provided markets with good news and euro benefitted as such.  There has been a general hawkish demeanour coming from the ECB last week and this has led to the belief that a rate cut in January is unlikely.  The ECB have made it clear that they are not keen to shift their rate fixing policy and as such we expect that they will continue to make modest adjustments to their interest rate in the first quarter of 2009.

Finally, what to look to this week for sterling?  We have a raft of data out this week for sterling and although busy we generally see this week as the beginning of the wind down to Christmas.  As such lower volumes will be moved and so expect more volatility than last week in the major crosses.  Retail figures, RPI, CPI begin the deluge tomorrow. BoE minutes on Wednesday appear a foregone conclusion but we will look with interest to see if they provide any indication of a further interest rate cut in January. At the same time we will get the November Jobless figures.  Thursday’s Retail Sales Figures see us optimistic as a strong Retails figure for November will provide some respite for GBP but do not count any French hens.

Trade of the week

This week’s trade of the week is a Protection Option for a seller of sterling and buyer of USD. The protection option enabled the client to participate in all beneficial upward movement, yet remain fully protected below a worst case rate of 1.45. This Protection Option required a premium of 4% of the total contract amount. For full details of this structure please contact one of our options traders on 0207 801 9050.

Have a great week

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