One was that the fudge over the European Central Bank presidency signalled a weak euro that would be manipulated by politicians. The pound will therefore rise because sterling is a safe haven from the turbulence of the Continent, argued those who see Mr Duisenberg and Mr Trichet as puppets in the unreliable hands of presidents and finance ministers.
The alternative view was that the ECB deal, however messy, is now history, and there is no way for politicians to interfere in future in the decisions of 17 central bankers with fixed terms of office voting in secret. According to this way of thinking, the ECB, preceded by the Bundesbank during the next few months, will be ultra-tough on interest rates to establish credibility, so the pound will fall.
The pound did droop noticeably against the mark yesterday, taking sterling's fall to 5 per cent since a peak of just under DM3.10 on April Fool's Day. The down-with-the-pound tendency was pushing in the same direction as the existing trend. The question is whether the introduction of the single currency will help this welcome trend continue.
There are two good reasons for thinking it will. One is the shifting balance of economic growth and interest rates as the UK economy cools off. The chances that UK rates have reached their peak have increased with of the most recent data. A slowdown is now obviously under way. Meanwhile, the German and French economies are picking up slowly, while other euro member economies are steaming ahead. This points to convergence at a relatively high level of interest rates by the ECB when it takes its first vote next January, and by member central banks co-ordinating policy in the run-up to that handover.
The second reason is that, no matter how much investors might regard sterling as a safe haven from Continental storms, there will be many who wish to increase the weight of euro assets in their portfolios. So far, none of the benchmark indices widely used by investors has incorporated the euro, but this will change over the next six months. When they do, many big investors will be required to adjust their portfolios to reflect those weights, and that means buying euros. Sterling is the obvious candidate for a withdrawal of funds when that happens.
Obviously events might yet outweigh these reasons - a Tietmeyer resignation, for example, or a relapse into recession in France or Germany. But until some real drama occurs, the pound looks more likely to drift lower than to soar to new heights because politicians could not agree on a choice between central bankers.Reuse content