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Euros To Pounds – G7 Meeting Rome

UK Chancellor Alastair Darling is in for a rough ride this weekend as the French and German finance ministers are expected to confront him over the weakness of the UK pound at tonight’s opening dinner in Rome. Many experts and commentators believe that they will exert some pressure to increase the value of the pound by direct action, following its worst devaluation since the breakdown of the Bretton Woods agreement in the mid 70’s. As we have seen in the last few days, the pound moved lower against the euro along with a basket of other currencies, largely on the back of the word ” deep” used to describe the current recession in the UK by Mervyn King. In addition the Bank of England has now acknowledged that it is planning to start buying gilts immediately as part of its effort to restore the currency. Needless to say, many companies in Europe are now complaining that their exports are being hit hard, with many businesses switching to cheaper UK goods and services. In addition to describing the economy as being in a deep recession, the BOE also signalled that interest rates were likely to fall even further in the coming months, possibly to zero, replicating a vision of the Japanese recession of the early 1990’s which lasted 10 years. In addition, the Bank also suggested that it would soon start to pump cash directly into the economy, along with buying government securities.

None of this has endeared Mr Darling ( or Mr Brown who thinks he is in charge), to his European colleagues who are furious at the problems that this policy is creating in Europe, and they have all indicated that the issue of currency exchange will be high on the agenda at the meeting. Hence as I have been saying all week, I would suggest that any open positions are closed as we wait for any reaction to the meeting to hit the market on Sunday evening.