Question: What are the charts saying to you regarding Euro/Sterling? Do you think Sterling is likely to slip further against the Euro or the reverse?
Answer: Currencies are not my main thing, but I’ll jot down a couple of thoughts.
1. Economics
It is thought the Euro-zone recovery will be sooner/stronger than the UK recovery. As such you would expect the Euro to strengthen versus the Sterling.
That is based on ‘expectations’ and expectations are often wrong. For example, a couple of years ago I was at a breakfast seminar with about 8 of Australia’s top economists. In the Q&A session one fellow got up to ask “Where do you see the Aussie Dollar going in the next few months?” All but one economist said lower. The odd one out said “a few cents higher, then probably lower”. The AUD/USD was around 0.7500 at the time. In the follow months it rallied to a high of around 0.9850. So much for forecasts…
Back to the Euro however, we have already seen the Euro stronger versus the Sterling in recent weeks (at 2.5 month high as we speak). It will need more and more Euro-positive data to keep feeding this rally. Without that feeding, the rally will not continue.
2. Seasonal patterns
I have put together a 10yr average seasonal chart – see below. Sometimes these seasonal patterns can be very reliable.
Based on this data, we are likely to see Euro weakness (Sterling strength) into December. Then a sharp reversal around Xmas time (Euro strength, Sterling weakness – possibly related to holiday/Xmas season?), then another reversal after that.
The blue line shows the 10yr seasonal pattern. I think it is very interesting to see the orange line. This shows the actual pattern over the last 12 or so months. It is following the 10yr average very closely. To me that suggests we should add some weight to the seasonally weak (weak Euro that is) pattern normally seen from about now into December.
If you want to lock in higher Sterling rates (weaker Euro) however, consider doing this in November or thereabouts.
-GB
Seasonal chart (based on March futures)
