With the headlines from the eurozone going from bad to worse and confidence in the euro nearing rock bottom, the logic would be that the pound in our pockets should be worth more. Caxton FX explains why this is not the case.
Since early March, sterling has moved from below €1.10 to high of €1.1880 hit on May 17th, but has stopped gaining at that point. We have seen the price consolidate its position between €1.16 and €1.17 in the past couple of weeks and, in the short term at least, it looks set to remain in that range.
There are number of reasons accounting for sterling’s comparative weakness, perhaps the most predominant of which is Britain’s exposure to the eurozone.
Duncan Higgins, senior analyst at Caxton FX explains, “The eurozone comprises Britain’s largest trading partner and a deepening of the crisis could quickly sap demand for UK exports. Inevitably then, our interests are similarly aligned as a strong recovery in Europe should have a positive impact on the British economy.”
Concerns about the banking crisis in the eurozone are also weighing on the pound.
“The FTSE’s recent declines have been led by the banking sector, with fears growing about the level of exposure that UK banks have to the troubles in Southern Europe. Although CajaSur is a comparatively small bank, there are risks that Spain would have to step in to salvage more banks as the price of interbank borrowing is beginning to soar,” says Higgins.
Adding to the pounds already heavy load is the government’s proposed action toward the deficit. This has impacted negatively on sterling.
Higgins says, “Although the market is in approval of the government’s budget cutting policies, there are risks that these could undermine the strength of the recovery. Monetary policy will likely be kept loose longer than was initially expected to accommodate these cutbacks, which provides another drag on the currency.”
The pound, particularly in this current climate, is still considered a “risky” asset. With risk aversion as high as it is, it is really only the US dollar and Japanese yen that are is a strong position.
“Whilst the pound continues to be sold in favour of safer currencies, this will weigh sterling’s movement against the euro. With markets remaining as jittery as they are, it is unlikely that we will see sterling break out of its current range against the euro in the short term,” concludes Higgins.
Thursday 27 May 2010
Tuesday 18 May 2010
UK inflation hits its highest level in 18-months
The rate of inflation in Britain rose again last month and now stands at its highest level since November 2008.
Standing at 3.7%, up from March’s figure of 3.4%, the data once again beat expectations. However, even a leap of this extent will have little impact on the markets with investors heavily focused on the government’s upcoming budget proposals. The market is also expecting little change in rhetoric from the Bank of England, which recently in its quarterly report maintained its line that inflation will head back towards the 2.0% target in the coming months.
Duncan Higgins, senior analyst at Caxton FX comments, “The Bank’s policy has for some time now been that the prevailing degree of spare capacity in the market should start to push headline inflation sharply lower. At present the rate of increase is showing little sign of slowing. Certain policymakers have already voiced their concern about these upward pressures and April’s figure could bring more people into their school of thought.”
Sterling’s comparative weakness, which raises the price of imports, is serving to offset the cheaper value of British exports. There are also fears that should the government choose to raise VAT, which Cameron has refused to rule out, inflation may remain on its current course.
“Although at present the Bank believes that the downside pressures on inflation are stronger, there are clearly still significant risks to the upside. In his budget should Osborne outline plans to raise VAT, inflation could take significantly more time to drop back down. In this scenario, the Bank could come under increasing pressure to raise interest rates in order to curb rising prices,” continues Higgins.
Taking its lead from sovereign debt concerns, sterling is lower again this morning, trading around 1.1650 against the euro and 1.4450 against the dollar.
Standing at 3.7%, up from March’s figure of 3.4%, the data once again beat expectations. However, even a leap of this extent will have little impact on the markets with investors heavily focused on the government’s upcoming budget proposals. The market is also expecting little change in rhetoric from the Bank of England, which recently in its quarterly report maintained its line that inflation will head back towards the 2.0% target in the coming months.
Duncan Higgins, senior analyst at Caxton FX comments, “The Bank’s policy has for some time now been that the prevailing degree of spare capacity in the market should start to push headline inflation sharply lower. At present the rate of increase is showing little sign of slowing. Certain policymakers have already voiced their concern about these upward pressures and April’s figure could bring more people into their school of thought.”
Sterling’s comparative weakness, which raises the price of imports, is serving to offset the cheaper value of British exports. There are also fears that should the government choose to raise VAT, which Cameron has refused to rule out, inflation may remain on its current course.
“Although at present the Bank believes that the downside pressures on inflation are stronger, there are clearly still significant risks to the upside. In his budget should Osborne outline plans to raise VAT, inflation could take significantly more time to drop back down. In this scenario, the Bank could come under increasing pressure to raise interest rates in order to curb rising prices,” continues Higgins.
Taking its lead from sovereign debt concerns, sterling is lower again this morning, trading around 1.1650 against the euro and 1.4450 against the dollar.
Wednesday 12 May 2010
ConDem Nation sees sterling rise
The currency market has been stuck in limbo over the past few days, following the indecisive nature of the electoral result.
Trading has been extremely volatile, with investors reacting to the news as it breaks from Westminster. The political scene as it stands has come as a positive for both the UK gilt market and the currency, with a substantial part of uncertainty now removed.
Duncan Higgins, senior analyst at Caxton FX comments, “The market’s leading concern is Britain’s fiscal predicament and how the incoming government chooses to address it. From the market’s perspective, the Liberals concession on the timing of cutbacks has been particularly positive. The view now is that a coalition between the Conservatives and Lib Dems should still have the strength to enforce the necessary measures to bring Britain’s finances back under control.”
Sterling rallied across the board yesterday following the news and is continuing to edge higher this morning. However, just as one period of uncertainty comes to a close, speculation builds on just how the coalition will work in practice.
“In theory, Cameron’s entrance into Number 10 will have calmed markets for the moment. However, building a stable coalition is going to be a tall task and there is already severe dissent being voiced on both sides about the concessions being made to accommodate the other. The situation remains on a knife edge, and sterling is certainly still liable to pull back should problems arise,” continues Higgins.
The other major factor buoying sterling is the fragility of the situation in the eurozone. The recent bailout failed to allay fears, and the euro’s status as a reserve currency is coming increasingly under threat. At present sterling is holding around the 1.18 level.
Duncan Higgins adds, “Providing there are no nasty surprises from Westminster in the coming weeks, we could see sterling back above €1.20 by June."
Trading has been extremely volatile, with investors reacting to the news as it breaks from Westminster. The political scene as it stands has come as a positive for both the UK gilt market and the currency, with a substantial part of uncertainty now removed.
Duncan Higgins, senior analyst at Caxton FX comments, “The market’s leading concern is Britain’s fiscal predicament and how the incoming government chooses to address it. From the market’s perspective, the Liberals concession on the timing of cutbacks has been particularly positive. The view now is that a coalition between the Conservatives and Lib Dems should still have the strength to enforce the necessary measures to bring Britain’s finances back under control.”
Sterling rallied across the board yesterday following the news and is continuing to edge higher this morning. However, just as one period of uncertainty comes to a close, speculation builds on just how the coalition will work in practice.
“In theory, Cameron’s entrance into Number 10 will have calmed markets for the moment. However, building a stable coalition is going to be a tall task and there is already severe dissent being voiced on both sides about the concessions being made to accommodate the other. The situation remains on a knife edge, and sterling is certainly still liable to pull back should problems arise,” continues Higgins.
The other major factor buoying sterling is the fragility of the situation in the eurozone. The recent bailout failed to allay fears, and the euro’s status as a reserve currency is coming increasingly under threat. At present sterling is holding around the 1.18 level.
Duncan Higgins adds, “Providing there are no nasty surprises from Westminster in the coming weeks, we could see sterling back above €1.20 by June."
Monday 10 May 2010
Friday 7 May 2010
Hung parliament sends sterling to gallows
After months of speculation, it appears that the pollsters have called it and the UK looks set for a hung parliament.
As the results have trickled in the Conservatives, as was expected, have got the majority vote and leading number of seats. However, they are certainly going to fall short of the 326 needed to form a majority and the markets have reacted accordingly. Sterling has slipped sharply across the board this morning, down over a percent against nearly all the majors.
Duncan Higgins, senior analyst at Caxton FX comments, “The political wrangling will begin in earnest next week, and credible signs of a working government could still be days, or even weeks away. In that time it is unlikely that we will see much reprieve for sterling. The fact that the markets have been pricing in a hung parliament scenario for some time now has almost certainly prevented the pound from sliding further against the euro.”
“The uncertainty surrounding the next government has simply compounded pressure on sterling, and against the dollar it is continuing to drop. With the ongoing crisis in the eurozone and its longer-term ramifications also in focus, we are not too optimistic about sterling’s short term prospects,” continues Higgins.
Sterling is currently trading just above 1.15 against the euro and it could begin to bounce back in the latter parts of next week should the coalition talks prove fruitful. Against the US currency, the pound is now nearing $1.46 and there could be further mileage in this drop should the US release positive job numbers today.
As the results have trickled in the Conservatives, as was expected, have got the majority vote and leading number of seats. However, they are certainly going to fall short of the 326 needed to form a majority and the markets have reacted accordingly. Sterling has slipped sharply across the board this morning, down over a percent against nearly all the majors.
Duncan Higgins, senior analyst at Caxton FX comments, “The political wrangling will begin in earnest next week, and credible signs of a working government could still be days, or even weeks away. In that time it is unlikely that we will see much reprieve for sterling. The fact that the markets have been pricing in a hung parliament scenario for some time now has almost certainly prevented the pound from sliding further against the euro.”
“The uncertainty surrounding the next government has simply compounded pressure on sterling, and against the dollar it is continuing to drop. With the ongoing crisis in the eurozone and its longer-term ramifications also in focus, we are not too optimistic about sterling’s short term prospects,” continues Higgins.
Sterling is currently trading just above 1.15 against the euro and it could begin to bounce back in the latter parts of next week should the coalition talks prove fruitful. Against the US currency, the pound is now nearing $1.46 and there could be further mileage in this drop should the US release positive job numbers today.
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