The likelihood of a defeat for Labour is positive for the pound. Euro zone economic data are uninspiring but not harmful to the euro.
Monday's €1.1250 opening proved to be too rich for sterling's blood and it quickly began to retreat. It traded below €1.11 on Tuesday, rebounded to €1.12 on Wednesday, fell back below €1.11 on Thursday and bounced yet again to €1.12 on Friday before retracing its steps downwards to open at €1.11 in London this morning.
The UK economy delivered some decently positive data. Two purchasing managers' indices, one for the manufacturing sector, the other for services, extended their progress into the 'expansion zone' above 50. The manufacturing PMI came in at 54.6, taking second place to the equivalent US measure. Services, with a score of 56.8, led the international field.
The Halifax house price index added 1% in December, putting it 1.1% higher than it was at the end of 2008. Factory gate prices went up by 3.5% last year, squeezing manufacturers who had to cope with costs rising twice as quickly over the same period.
But it was not the economic data that shaped sterling's performance, it was politics. News of an attempt to oust prime minister Brown sent the pound lower; confirmation that the coup had failed sent it back up again. Investors believe that a solution to Britain's spending gap requires a change of government.
As long as it looks as though Labour will be out of office by June they are inclined to be patient with sterling. And as long as Gordon Brown is leading his party into the general election they are confident that will happen.
The euro zone economy did not have much to shout about. Inflation ticked higher again, rising to +0.9% but still leaving it at less than half the target rate. Unemployment was up too, reaching double figures at 10% in November, its highest level for a dozen years.
Spain was one of the biggest culprits on the unemployment front with one in five out of work and 40% of young people looking for a job. Euro zone retail sales fell by a disappointing -1.2% in November after a less than inspiring +0.2% increase the previous month.
Sales were down by -4% compared with a year earlier. The second and final revision to third quarter gross domestic product confirmed that Euroland's economy grew by +0.4% in the third quarter of last year.
Investors will be keen, as ever, to hear what the European Central Bank has to say after its first meeting of the year on Thursday. No change is expected to its 1.0%
Refinancing Rate but ECB President Jean-Claude Trichet will doubtless vouch an opinion about what might lie ahead for the euro zone economy. Although he never predicts where monetary policy is going he frequently drops hints.
The pound has spent most of the last three months between €1.09 and €1.13. It starts this week comfortably within that range and showing no sign of wanting to escape. We therefore stick to the existing risk management strategy: Buyers of the euro should stick to a hedged position, locking into a rate for half the money they will need.
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