Yet more talk but little action on debt issue
Little has come out of the recent EcoFin and IMF meetings, which is really testing the market’s patience. There have been rumours of a bolstered bailout fund but nothing concrete has emerged. Talk of substantial haricuts to Greek debt has also dogged the single currency. There is quite clearly recognition amongst officials both in and outside the eurozone that a failure to act decisively could have a catastrophic impact on the global economy. However, there remains a distinct lack of consensus on the path to be taken to resolve the debt crisis.
The eurozone economy has certainly been affected by the crisis, last week’s PMI data suggests that the region as a whole is on the brink of recession. In line with this slowdown and downside risks to eurozone inflation, speculation is increasing that that the ECB will be cutting its 1.50% interest rate. There have been contrasting comments from policymakers on the issue, but next week’s ECB meeting should provide some clarity on the matter. With investors still lured by the higher yield, a rate cut would doubtless hurt the euro.
Sterling still vulnerable to QE
Sterling has stabilised against the dollar for the time being, having dropped by over ten cents in the past month. The outlook remains fairly bleak against the greenback, however, which will continue to benefit from safe-haven investment in the current environment. Only a credible plan of action is likely to alleviate debt fears (the market has been repeatedly disappointed on this issue), global growth only appears to be going one way (down), and the associated declines in global stocks is always going to benefit the safer dollar.
In terms of domestic UK currency issues, further quantitative easing is the key issue, and looks very likely to weigh on the pound moving forward. The measure could be introduced as soon as next week’s Bank of England meeting. Noises out of the MPC have been more dovish than ever and the minutes of September’s meeting smacked of a precursor to monetary easing.
Against the euro, sterling’s prospects look a little brighter regardless of the threat of QE. Market confidence in EU officials is really ebbing and perhaps just as important are the potential stumbling blocks over which they have no control. The second Greek bailout needs to be ratified by eurozone parliaments and the Greek parliament needs to ratify a fresh round of Greek austerity measures.
This week brings relatively little by way of scheduled data releases. Market focus will remain on the debt situation in the eurozone then, and this is likely to throw up some significant volatility. Nonetheless, we are betting on further ‘risk off’ trading and net dollar gains.
Sterling is trading at €1.15 today and while major gains seem unlikely ahead of the Bank of England’s meeting next week, there is still some upside potential. Against the dollar, sterling is likely to remain under pressure and we cannot envisage any substantial sterling bounce in the current environment. With the gravity of the debt crisis increasing almost by the day, we are betting that the market will have to wait longer for any relief headline that may eventually come.
End of week forecast
GBP / EUR 1.1575
GBP / USD 1.55
EUR / USD 1.34
GBP / AUD 1.6050
Monday 26 September 2011
Thursday 22 September 2011
Dollar strength: Is it here to stay?
The pound has tumbled to a one year low against the dollar today. The pounds slide has been pretty staggering; we have seen GBP/USD fall from $1.65 to the current rate of $1.5350. Why?
The collapse is a result of several factors. First, sterling is fundamentally an immensely unappealing currency. The MPC last month voted in its entirety for a hold to the record low Bank of England interest rate of 0.5%, meaning the two remaining hawks had abandoned their quest for an interest rate hike. With inflation expected to fall fairly rapidly next year, and with UK growth clearly on a downtrend, the market has given any hopes of a higher UK interest rate. The recent MPC minutes reveal that they are very close indeed to pulling the trigger on introducing further quantitative easing.
Second, the euro/dollar pairing has collapsed. The GBP/USD rate to a large extent tracks the EUR/USD pairing, which has suffered a ten cent collapse in the past month. Concerns surrounding the eurozone debt crisis have finally taken their toll on the single currency with Greece seemingly certain to default at some point and with no long-term solution in sight. The UK’s proximity and exposure to a eurozone debt and a potential Lehman’s-style collapse in the European banking system, has also weighed on sterling and triggered huge euro-dollar flows.
Third, concerns over US and wider global growth have contributed to a hugely ‘risk off’ trading environment. Riskier currencies such as the Canadian, kiwi and Australian dollars are selling off as investors flee to the safety of the dollar. The huge losses in global equities that we are seeing will always benefit safe-havens such as the dollar. The fact that the US economy is in such a fragile state makes little difference, in fact the extent to which the world’s largest economy is struggling only intensifies the safe-haven flows which are benefiting the dollar.
Finally, the dollar is enjoying a greater share of the safe-haven pie. This is because the former safe-haven of choice, the swiss franc, has lost its appeal. The Swiss National Bank has intervened in the currency markets to curb the excessive strength of the swissie, so the market has been scared off. Though it has been unsuccessful in its interventions of late, the Bank of Japan nevertheless looks likely to take similar action to weaken the yen. USD/JPY is at record lows near 76.00, so the Bank of Japan’s patience is certainly being tested.
Do we see sterling making further losses to the dollar? Yes we do. There seems to be little on the horizon to fuel much of a sterling rebound. Contrastingly, fears over global growth look likely to persist. Likewise, the other major concern- the eurozone debt situation, looks unlikely see any significant progress in the near future. The outlook is very positive for the US dollar then, albeit the opposite is true for the US economy.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
The collapse is a result of several factors. First, sterling is fundamentally an immensely unappealing currency. The MPC last month voted in its entirety for a hold to the record low Bank of England interest rate of 0.5%, meaning the two remaining hawks had abandoned their quest for an interest rate hike. With inflation expected to fall fairly rapidly next year, and with UK growth clearly on a downtrend, the market has given any hopes of a higher UK interest rate. The recent MPC minutes reveal that they are very close indeed to pulling the trigger on introducing further quantitative easing.
Second, the euro/dollar pairing has collapsed. The GBP/USD rate to a large extent tracks the EUR/USD pairing, which has suffered a ten cent collapse in the past month. Concerns surrounding the eurozone debt crisis have finally taken their toll on the single currency with Greece seemingly certain to default at some point and with no long-term solution in sight. The UK’s proximity and exposure to a eurozone debt and a potential Lehman’s-style collapse in the European banking system, has also weighed on sterling and triggered huge euro-dollar flows.
Third, concerns over US and wider global growth have contributed to a hugely ‘risk off’ trading environment. Riskier currencies such as the Canadian, kiwi and Australian dollars are selling off as investors flee to the safety of the dollar. The huge losses in global equities that we are seeing will always benefit safe-havens such as the dollar. The fact that the US economy is in such a fragile state makes little difference, in fact the extent to which the world’s largest economy is struggling only intensifies the safe-haven flows which are benefiting the dollar.
Finally, the dollar is enjoying a greater share of the safe-haven pie. This is because the former safe-haven of choice, the swiss franc, has lost its appeal. The Swiss National Bank has intervened in the currency markets to curb the excessive strength of the swissie, so the market has been scared off. Though it has been unsuccessful in its interventions of late, the Bank of Japan nevertheless looks likely to take similar action to weaken the yen. USD/JPY is at record lows near 76.00, so the Bank of Japan’s patience is certainly being tested.
Do we see sterling making further losses to the dollar? Yes we do. There seems to be little on the horizon to fuel much of a sterling rebound. Contrastingly, fears over global growth look likely to persist. Likewise, the other major concern- the eurozone debt situation, looks unlikely see any significant progress in the near future. The outlook is very positive for the US dollar then, albeit the opposite is true for the US economy.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Wednesday 21 September 2011
MPC minutes reveal increased chance of UK QE.
This morning’s MPC minutes have weighed heavily on the pound today. The Bank of England’s rate-setting committee revealed that growth in the second half of this year is likely to be “materially weaker than forecast in August.” The minutes also indicated that a move towards additional UK quantitative easing “was finely balanced for most MPC members” and that “it was increasingly likely that [it] would be warranted at some point.”
Significantly, leading MPC dove Adam Posen was not joined by any of his colleagues in his call for an additional £50bn worth of asset purchases. However, the comments above really do look to be the precursor to further easing and the market has taken its cue to hurt the pound. Today’s news doesn’t come as too much of a surprise after the Bank of England’s third quarterly bulletin, which celebrated the effects of the last round of quantitative easing.
The market is now looking ahead to next month’s Bank of England meeting, where they may well finally pull the trigger on QE. The truth is that UK data is on a steady downtrend and most signs are really pointing towards a double-dip recession.
Sterling has come off highs up above €1.17, to trade at levels comfortably below €1.14 this afternoon. Do we see this lasting? Well, we find it difficult to envisage the euro maintaining this level of support in the medium term. There remains a sense that the next scare or damaging bad news headline from the eurozone is never far from view. Admittedly, the euro has traded robustly in the face of Italy’s debt downgrade yesterday but the Greek issue is still unresolved. In addition, sterling has suffered of late with the UK economy in the spotlight, but attention is likely to shift away until early October’s PMI data. This may give sterling a little breathing space over the coming week and a half or so.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Significantly, leading MPC dove Adam Posen was not joined by any of his colleagues in his call for an additional £50bn worth of asset purchases. However, the comments above really do look to be the precursor to further easing and the market has taken its cue to hurt the pound. Today’s news doesn’t come as too much of a surprise after the Bank of England’s third quarterly bulletin, which celebrated the effects of the last round of quantitative easing.
The market is now looking ahead to next month’s Bank of England meeting, where they may well finally pull the trigger on QE. The truth is that UK data is on a steady downtrend and most signs are really pointing towards a double-dip recession.
Sterling has come off highs up above €1.17, to trade at levels comfortably below €1.14 this afternoon. Do we see this lasting? Well, we find it difficult to envisage the euro maintaining this level of support in the medium term. There remains a sense that the next scare or damaging bad news headline from the eurozone is never far from view. Admittedly, the euro has traded robustly in the face of Italy’s debt downgrade yesterday but the Greek issue is still unresolved. In addition, sterling has suffered of late with the UK economy in the spotlight, but attention is likely to shift away until early October’s PMI data. This may give sterling a little breathing space over the coming week and a half or so.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Tuesday 13 September 2011
Caxton FX Weekly Round-up
Eurozone concerns peak and the euro plummets
Concerns over the eurozone debt crisis have peaked in recent sessions, which has seen the key euro/dollar pairing decline by nine cents in the space of a fortnight. Fuelling this sell-off, which has also seen the euro hit a ten-year low against the yen, are intense fears of a Greek default. Greece is not meeting its deficit targets and unless sufficient austerity measures are implemented, then it may not receive its next tranche of aid.
German patience with Greece, which has been crucial in maintaining confidence in the euro, is clearly wearing very thin. Comments from politicians in the leading eurozone nation have alluded to a possible default and Greek exit. The market is now estimating that the probability of a Greek default within the next five years is 98%. A default and the effects it would almost certainly have throughout major eurozone nations such as Italy and Spain cannot yet be fully priced in. Accordingly, the euro has plenty of downside potential.
Importantly, we have seen Asian sovereigns withhold their previously reliable support for the single currency. Rumours of Chinese support for Italian debt stabilised the euro’s fall on Monday, but this seems highly unlikely to provide any sustained euro relief rally. Italian bond yields also soared at a debt auction today regardless. In addition, France’s main banks are facing further downgrades due to their exposure to Greek debt.
The ECB looks increasingly likely to cut its interest rate, which along with solid Asian support, has driven the single currency to such strong levels. The absence of these two factors and the worsening of the eurozone debt crisis have caused us to revise our relatively bullish outlook on the euro. The imminent threat of a Greek default and a collapse in the European banking system should ensure further euro weakening in both the short and longer term. The effect of eurozone officials’ habit of much talk and little action seems likely to ensure that any solution to the eurozone crisis will be very slow in coming and market scepticism is growing all the time.
Bank of England holds fire on QE
Last week saw the Bank of England decide against introducing further quantitative easing to the UK economy. Recent PMI data from the UK was very poor so the speculation for monetary easing certainly built ahead of last Thursday’s announcement. Next Wednesday’s MPC minutes will reveal just how close the BoE policymakers were to pulling the trigger. As ever, if figures continue to weaken, the measure will continue to threaten to weaken the pound.
Sterling is trading fairly strongly in the current risk-off environment, except against the dollar which has gained in safe-haven inflows since the Swiss National Bank’s intervention in the swiss franc’s strength.
After trading at €1.17 early on Monday morning, sterling is trading a cent and a half lower but the risks of further euro-weakening are all too clear. Against the dollar, sterling is trading down at $1.58 and is looking significantly more vulnerable. The key factor governing this outlook is an even weaker looking euro/dollar pairing, which looks hard pushed to make a sustained move back above $1.40 in the current environment.
End of week forecast
GBP / EUR 1.16
GBP / USD 1.57
EUR / USD 1.3550
GBP / AUD 1.5350
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Concerns over the eurozone debt crisis have peaked in recent sessions, which has seen the key euro/dollar pairing decline by nine cents in the space of a fortnight. Fuelling this sell-off, which has also seen the euro hit a ten-year low against the yen, are intense fears of a Greek default. Greece is not meeting its deficit targets and unless sufficient austerity measures are implemented, then it may not receive its next tranche of aid.
German patience with Greece, which has been crucial in maintaining confidence in the euro, is clearly wearing very thin. Comments from politicians in the leading eurozone nation have alluded to a possible default and Greek exit. The market is now estimating that the probability of a Greek default within the next five years is 98%. A default and the effects it would almost certainly have throughout major eurozone nations such as Italy and Spain cannot yet be fully priced in. Accordingly, the euro has plenty of downside potential.
Importantly, we have seen Asian sovereigns withhold their previously reliable support for the single currency. Rumours of Chinese support for Italian debt stabilised the euro’s fall on Monday, but this seems highly unlikely to provide any sustained euro relief rally. Italian bond yields also soared at a debt auction today regardless. In addition, France’s main banks are facing further downgrades due to their exposure to Greek debt.
The ECB looks increasingly likely to cut its interest rate, which along with solid Asian support, has driven the single currency to such strong levels. The absence of these two factors and the worsening of the eurozone debt crisis have caused us to revise our relatively bullish outlook on the euro. The imminent threat of a Greek default and a collapse in the European banking system should ensure further euro weakening in both the short and longer term. The effect of eurozone officials’ habit of much talk and little action seems likely to ensure that any solution to the eurozone crisis will be very slow in coming and market scepticism is growing all the time.
Bank of England holds fire on QE
Last week saw the Bank of England decide against introducing further quantitative easing to the UK economy. Recent PMI data from the UK was very poor so the speculation for monetary easing certainly built ahead of last Thursday’s announcement. Next Wednesday’s MPC minutes will reveal just how close the BoE policymakers were to pulling the trigger. As ever, if figures continue to weaken, the measure will continue to threaten to weaken the pound.
Sterling is trading fairly strongly in the current risk-off environment, except against the dollar which has gained in safe-haven inflows since the Swiss National Bank’s intervention in the swiss franc’s strength.
After trading at €1.17 early on Monday morning, sterling is trading a cent and a half lower but the risks of further euro-weakening are all too clear. Against the dollar, sterling is trading down at $1.58 and is looking significantly more vulnerable. The key factor governing this outlook is an even weaker looking euro/dollar pairing, which looks hard pushed to make a sustained move back above $1.40 in the current environment.
End of week forecast
GBP / EUR 1.16
GBP / USD 1.57
EUR / USD 1.3550
GBP / AUD 1.5350
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Tuesday 6 September 2011
Swiss National Bank Gets Aggressive
The SNB announced this morning that it intends to keep the EUR/CHF rate at a minimum of 1.20 - this is the 'floor' which it will be defending. This direct intervention in the currency market caused the swiss franc to understandably sell off sharply across the board in response.
With the SNB recently warning the Swiss public that they would have to endure a strong swiss franc for the foreseeable future, there has been some market scepticism towards the SNB’s genuine commitment/ability to limit the currency’s strength. The SNB’s announcement this morning referred to “utmost determination” to containing further CHF appreciation, and it has had the desired effect; the 1.20 target was achieved in a matter of minutes.
Central bank currency intervention has failed repeatedly; we have seen it in both the yen and the swiss franc. It can slow the pace of appreciation, but it does not reverse the trend. Could this time be different? The SNB definitely looks serious this time, claiming willingness to buy “unlimited quantities of foreign currency.” Whether it is successful or not, it is likely to cost the SNB hugely.
The EUR/CHF target rate of 1.20 will almost certainly be tested by speculators and ongoing safe-haven flows alike. Concerns surrounding global growth and eurozone debt are not going anywhere, so demand for safer assets like the swissie will persist. Nonetheless, in the short-term, you can expect the SNB to stick to their task. There could be some further major moves in the offing as well, as other central banks respond.
Knee-jerk moves saw the EUR/CHF gain by 8.5% and the GBP/CHF by almost 8.0%; these are major moves. The effects have been felt throughout the currency markets though; GBP/EUR has declined fairly sharply as investors get out of the swissie and into the single currency.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
With the SNB recently warning the Swiss public that they would have to endure a strong swiss franc for the foreseeable future, there has been some market scepticism towards the SNB’s genuine commitment/ability to limit the currency’s strength. The SNB’s announcement this morning referred to “utmost determination” to containing further CHF appreciation, and it has had the desired effect; the 1.20 target was achieved in a matter of minutes.
Central bank currency intervention has failed repeatedly; we have seen it in both the yen and the swiss franc. It can slow the pace of appreciation, but it does not reverse the trend. Could this time be different? The SNB definitely looks serious this time, claiming willingness to buy “unlimited quantities of foreign currency.” Whether it is successful or not, it is likely to cost the SNB hugely.
The EUR/CHF target rate of 1.20 will almost certainly be tested by speculators and ongoing safe-haven flows alike. Concerns surrounding global growth and eurozone debt are not going anywhere, so demand for safer assets like the swissie will persist. Nonetheless, in the short-term, you can expect the SNB to stick to their task. There could be some further major moves in the offing as well, as other central banks respond.
Knee-jerk moves saw the EUR/CHF gain by 8.5% and the GBP/CHF by almost 8.0%; these are major moves. The effects have been felt throughout the currency markets though; GBP/EUR has declined fairly sharply as investors get out of the swissie and into the single currency.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Monday 5 September 2011
Caxton FX Weekly Round-up
UK growth data disappoints
The monthly instalment of growth data from the UK economy was weaker than expected. The manufacturing sector contracted again, and we saw the sharpest slide in the UK services sector in a decade. Sterling has not suffered too much as a result (except against the dollar), with the market focused on wider global concerns. The Bank of England meets again this week and there is likely to be increased discussion of monetary easing in light of recent economic data. Our bet is that given the UK services sector remains in expansionist territory, they will hold fire for now.
Poor US non-farms data adds to QE3 speculation
There was some promising data from the US last week; PMI data from Chicago was impressive, as was a factory orders figure. However, some awful consumer confidence and non-farm payrolls data stole the headlines. The former gave its worst showing in over two years, and the latter gave its worse showing in almost a year. The safer dollar is therefore outperforming at present, with global stocks in decline amid the familiar concerns over global (and particularly US) growth and the eurozone crisis.
Nonetheless, we are sticking to our longer-term forecast of a weaker US dollar. The Fed will be having an extended discussion as to monetary policy responses to the US economic slowdown at its meeting this month. If data continues to decline, we may well see Ben Bernanke’s hand forced on QE3. The major US data releases this week include non-manufacturing PMI data on Tuesday afternoon and trade balance data on Thursday. In truth though, the dollar’s performance this week will probably depend on risk appetite and activity in the global equity markets. The dollar is approaching the upper limits of its trading ranges against both the euro and the pound at present. We doubt that there is sufficient momentum for the dollar to push through these barriers, though there remains significant risk.
Eurozone concerns weigh on the single currency
Merkel suffered another German election defeat, this time in her home state, which has added to already heightened market uncertainty. The growing signs of domestic frustration at Germany’s leading role in eurozone bailouts are a real concern. In addition, the market is nervous ahead of Wednesday’s constitutional ruling from a German court on the country’s contribution to the bailouts.
Greece is also back in the headlines, with various nations demanding collateral for their contributions to the troubled nation’s second bailout, and with Greek officials in disagreement with the IMF/EU/ECB over further budget cuts. With all these eurozone issues weighing and more besides, EUR is definitely on the back foot. Nonetheless, Asian sovereigns have been very reliable in buying the euro on dips this year, and with EUR/USD at $1.41, the euro looks unlikely to fall too much further.
Sterling is trading at 1.14 against the euro; it has a little more upside but should meet some fairly stiff resistance around €1.15. These look to be poor levels for GBP/USD, which is very close to multi-week lows. We are confident EUR/USD and GBP/USD will bounce this month, but this may have to wait for this week.
End of week forecast
GBP / EUR 1.14
GBP / USD 1.62
EUR / USD 1.42
GBP / AUD 1.5350
Richard Driver
Senior Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
The monthly instalment of growth data from the UK economy was weaker than expected. The manufacturing sector contracted again, and we saw the sharpest slide in the UK services sector in a decade. Sterling has not suffered too much as a result (except against the dollar), with the market focused on wider global concerns. The Bank of England meets again this week and there is likely to be increased discussion of monetary easing in light of recent economic data. Our bet is that given the UK services sector remains in expansionist territory, they will hold fire for now.
Poor US non-farms data adds to QE3 speculation
There was some promising data from the US last week; PMI data from Chicago was impressive, as was a factory orders figure. However, some awful consumer confidence and non-farm payrolls data stole the headlines. The former gave its worst showing in over two years, and the latter gave its worse showing in almost a year. The safer dollar is therefore outperforming at present, with global stocks in decline amid the familiar concerns over global (and particularly US) growth and the eurozone crisis.
Nonetheless, we are sticking to our longer-term forecast of a weaker US dollar. The Fed will be having an extended discussion as to monetary policy responses to the US economic slowdown at its meeting this month. If data continues to decline, we may well see Ben Bernanke’s hand forced on QE3. The major US data releases this week include non-manufacturing PMI data on Tuesday afternoon and trade balance data on Thursday. In truth though, the dollar’s performance this week will probably depend on risk appetite and activity in the global equity markets. The dollar is approaching the upper limits of its trading ranges against both the euro and the pound at present. We doubt that there is sufficient momentum for the dollar to push through these barriers, though there remains significant risk.
Eurozone concerns weigh on the single currency
Merkel suffered another German election defeat, this time in her home state, which has added to already heightened market uncertainty. The growing signs of domestic frustration at Germany’s leading role in eurozone bailouts are a real concern. In addition, the market is nervous ahead of Wednesday’s constitutional ruling from a German court on the country’s contribution to the bailouts.
Greece is also back in the headlines, with various nations demanding collateral for their contributions to the troubled nation’s second bailout, and with Greek officials in disagreement with the IMF/EU/ECB over further budget cuts. With all these eurozone issues weighing and more besides, EUR is definitely on the back foot. Nonetheless, Asian sovereigns have been very reliable in buying the euro on dips this year, and with EUR/USD at $1.41, the euro looks unlikely to fall too much further.
Sterling is trading at 1.14 against the euro; it has a little more upside but should meet some fairly stiff resistance around €1.15. These look to be poor levels for GBP/USD, which is very close to multi-week lows. We are confident EUR/USD and GBP/USD will bounce this month, but this may have to wait for this week.
End of week forecast
GBP / EUR 1.14
GBP / USD 1.62
EUR / USD 1.42
GBP / AUD 1.5350
Richard Driver
Senior Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Friday 2 September 2011
Caxton FX Monthly Outlook
August saw a collapse in global investor confidence which triggered huge losses in the stock market. Rating agency Stand & Poor’s downgrade of US debt proved the catalyst, but a variety of issues contributed to the slide in sentiment; global growth is stalling, the US economy is nearing another recession, and a long-term solution to the eurozone debt problem continues to evade us.
The US dollar and other safe-haven assets strengthened considerably amid the huge uncertainty that prevailed in early August but prospects for the dollar look negative. The Fed has announced that the US interest rate will remain at record lows until mid-2013, and debate within the central bank surrounding ‘QE3’ (further US quantitative easing) is ongoing. US economic data has broadly been very disappointing in recent weeks; hopes of a H2 pick-up in growth are diminishing and bets on another US recession are increasing.
Sterling enjoyed a strong few weeks, offering investors some safe-haven appeal of its own. With US and eurozone issues dominating the headlines, and with the Swiss National Bank and Bank of Japan taking measures to devalue their currencies, the market looked to sterling as a safer alternative. With confidence returning and risk appetite recovering, this theme has been reversed in the past week and the pound’s prospects are bearish; a poor growth outlook and a dovish central bank are weighing heavily.
Sterling/Euro
Eurozone concerns are at a reasonably low ebb at present; despite bond yields still at elevated levels, the ECB’s programme of buying Spanish, Italian, Portuguese and Irish bonds is a show of commitment that has gone some way to calming fears. Nonetheless, frustrations remain; the European Financial Stability Fund has not been expanded and is thus insufficient in size to deal with a Spanish or Italian bailout.
The proposal of a common eurobond has been rejected by Merkel and Sarkozy. Vague commitments to common governance and a Tobin tax were the main results of the two leaders’ last meeting, neither of which inspired much confidence. However, judging by the strength of the euro, the market seems willing to wait for officials to work out a longer-term answer to the eurozone’s structural debt problem.
The outlook for the ECB interest rate outlook is coming under increased scrutiny, in light of a slowdown in quarterly growth figures from Germany (0.1%), France (0.0%) and eurozone as a whole (0.2%).This slowdown is in line with a global trend however, as shown by a second quarter UK growth figure of 0.2%. It should be noted that Trichet was slightly more dovish at last month’s ECB press conference but nevertheless, the ECB have shown they are dedicated to controlling eurozone inflation and rate cut seems unlikely at this stage. The eurozone’s higher interest rate (1.50%) will continue to attract investment moving forward.
Last month’s MPC minutes made the UK interest rate outlook even more dovish, with the two remaining MPC hawks (Weale and Dale) abandoning their quest for a BoE interest rate hike. In addition, the recent Quarterly Inflation Report indicated a calmer outlook for inflation next year. With UK growth so weak, there is little pushing the BoE towards monetary tightening now.
Indeed, there is substantially more chance of further UK quantitative easing than of a rate hike. Last month’s manufacturing and construction PMI data was poor, as were retail sales and unemployment figures. The only saving grace was some strong growth in the UK services sector, which was enough to stave off fears of further UK quantitative easing for the time being. A poor showing in August’s PMI figures in coming sessions could well see this pair drop considerably, all eyes will be on the all-important services figure.
Sterling looks distinctly vulnerable to further falls against the euro. Global stocks are recovering in line with a return of risk appetite, which favours the single currency. The key driver of the euro also remains firmly in place - Asian sovereign diversification away from the dollar into the euro. With multiple bailouts in recent months and questions hanging over Spanish and Italian debt, and now concerns over German and French economic growth, the resolve of far eastern buyers has been tested but the euro seems destined to remain strong.
We have seen highs up at €1.1550 but this pair is trading back down at €1.1350 at present. In accordance with a weakened outlook for the US dollar, a dip down towards the key EUR/GBP target of 90p, which is equal to €1.1111, seems a decent bet.
GBP/USD
This pair remains true to its longer-term range of $1.59-1.67, with both currencies hemmed in by domestic economic underperformance. There have been some truly alarming US economic figures in recent weeks that have contributed significantly to the decline global stocks. US second quarterly growth undershot expectations (showing 1.0% expansion on an annualized basis) and Philly Fed manufacturing and consumer confidence data slid to levels not seen since the recession.
The Fed has responded by pledging to keep the US interest rate at its current record-low for two years to come, until mid-2013. Speculation of a third round of US quantitative easing has been rife over recent weeks and hopes were high for indications at Bernanke’s Fed press conference and his recent speech at Jackson Hole. The Fed Chairman has held fire on further monetary easing for now but the measure remains very much on the table. If data continues along its current downtrend, then the Fed will have to pull the trigger; many will have their sights set on the Fed’s September meeting. The meeting has been extended to two days, a reflection of the depth of debate surrounding the measures which the Fed is considering in order to stave off another US recession.
The longer-term impact of Standard & Poor’s downgrade of US debt (due to inadequate pledges of spending cuts) should not be underestimated. Looking ahead to next year, if the US government fails to address its fiscal position then further downgrades are likely; Standard & Poor’s has stated as much. The short-term fallout saw sterling fail to sustain a move higher against the dollar in the middle of August, having been rejected at $1.66.
The strength of the EUR/USD rate should keep sterling fairly well-supported against the dollar in coming weeks and months but we do not see any break of this pair’s longer-term range in the current climate. However, if US data does continue to worsen and the Fed does introduce QE3, a break towards $1.70 seems a very good bet indeed. In all likelihood, we may have to look beyond September for the Fed to pull the trigger, and this pair will continue to fluctuate in range in the short-term. An increasingly bearish outlook for the dollar, rather than sterling strength should mean that if there is any direction bias for this pair, it is to the upside from the current $1.62 trading level.
Caxton FX one month forecast:
GBP / EUR 1.12
GBP / USD 1.6350
EUR / USD 1.46
Richard Driver
Senior Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
The US dollar and other safe-haven assets strengthened considerably amid the huge uncertainty that prevailed in early August but prospects for the dollar look negative. The Fed has announced that the US interest rate will remain at record lows until mid-2013, and debate within the central bank surrounding ‘QE3’ (further US quantitative easing) is ongoing. US economic data has broadly been very disappointing in recent weeks; hopes of a H2 pick-up in growth are diminishing and bets on another US recession are increasing.
Sterling enjoyed a strong few weeks, offering investors some safe-haven appeal of its own. With US and eurozone issues dominating the headlines, and with the Swiss National Bank and Bank of Japan taking measures to devalue their currencies, the market looked to sterling as a safer alternative. With confidence returning and risk appetite recovering, this theme has been reversed in the past week and the pound’s prospects are bearish; a poor growth outlook and a dovish central bank are weighing heavily.
Sterling/Euro
Eurozone concerns are at a reasonably low ebb at present; despite bond yields still at elevated levels, the ECB’s programme of buying Spanish, Italian, Portuguese and Irish bonds is a show of commitment that has gone some way to calming fears. Nonetheless, frustrations remain; the European Financial Stability Fund has not been expanded and is thus insufficient in size to deal with a Spanish or Italian bailout.
The proposal of a common eurobond has been rejected by Merkel and Sarkozy. Vague commitments to common governance and a Tobin tax were the main results of the two leaders’ last meeting, neither of which inspired much confidence. However, judging by the strength of the euro, the market seems willing to wait for officials to work out a longer-term answer to the eurozone’s structural debt problem.
The outlook for the ECB interest rate outlook is coming under increased scrutiny, in light of a slowdown in quarterly growth figures from Germany (0.1%), France (0.0%) and eurozone as a whole (0.2%).This slowdown is in line with a global trend however, as shown by a second quarter UK growth figure of 0.2%. It should be noted that Trichet was slightly more dovish at last month’s ECB press conference but nevertheless, the ECB have shown they are dedicated to controlling eurozone inflation and rate cut seems unlikely at this stage. The eurozone’s higher interest rate (1.50%) will continue to attract investment moving forward.
Last month’s MPC minutes made the UK interest rate outlook even more dovish, with the two remaining MPC hawks (Weale and Dale) abandoning their quest for a BoE interest rate hike. In addition, the recent Quarterly Inflation Report indicated a calmer outlook for inflation next year. With UK growth so weak, there is little pushing the BoE towards monetary tightening now.
Indeed, there is substantially more chance of further UK quantitative easing than of a rate hike. Last month’s manufacturing and construction PMI data was poor, as were retail sales and unemployment figures. The only saving grace was some strong growth in the UK services sector, which was enough to stave off fears of further UK quantitative easing for the time being. A poor showing in August’s PMI figures in coming sessions could well see this pair drop considerably, all eyes will be on the all-important services figure.
Sterling looks distinctly vulnerable to further falls against the euro. Global stocks are recovering in line with a return of risk appetite, which favours the single currency. The key driver of the euro also remains firmly in place - Asian sovereign diversification away from the dollar into the euro. With multiple bailouts in recent months and questions hanging over Spanish and Italian debt, and now concerns over German and French economic growth, the resolve of far eastern buyers has been tested but the euro seems destined to remain strong.
We have seen highs up at €1.1550 but this pair is trading back down at €1.1350 at present. In accordance with a weakened outlook for the US dollar, a dip down towards the key EUR/GBP target of 90p, which is equal to €1.1111, seems a decent bet.
GBP/USD
This pair remains true to its longer-term range of $1.59-1.67, with both currencies hemmed in by domestic economic underperformance. There have been some truly alarming US economic figures in recent weeks that have contributed significantly to the decline global stocks. US second quarterly growth undershot expectations (showing 1.0% expansion on an annualized basis) and Philly Fed manufacturing and consumer confidence data slid to levels not seen since the recession.
The Fed has responded by pledging to keep the US interest rate at its current record-low for two years to come, until mid-2013. Speculation of a third round of US quantitative easing has been rife over recent weeks and hopes were high for indications at Bernanke’s Fed press conference and his recent speech at Jackson Hole. The Fed Chairman has held fire on further monetary easing for now but the measure remains very much on the table. If data continues along its current downtrend, then the Fed will have to pull the trigger; many will have their sights set on the Fed’s September meeting. The meeting has been extended to two days, a reflection of the depth of debate surrounding the measures which the Fed is considering in order to stave off another US recession.
The longer-term impact of Standard & Poor’s downgrade of US debt (due to inadequate pledges of spending cuts) should not be underestimated. Looking ahead to next year, if the US government fails to address its fiscal position then further downgrades are likely; Standard & Poor’s has stated as much. The short-term fallout saw sterling fail to sustain a move higher against the dollar in the middle of August, having been rejected at $1.66.
The strength of the EUR/USD rate should keep sterling fairly well-supported against the dollar in coming weeks and months but we do not see any break of this pair’s longer-term range in the current climate. However, if US data does continue to worsen and the Fed does introduce QE3, a break towards $1.70 seems a very good bet indeed. In all likelihood, we may have to look beyond September for the Fed to pull the trigger, and this pair will continue to fluctuate in range in the short-term. An increasingly bearish outlook for the dollar, rather than sterling strength should mean that if there is any direction bias for this pair, it is to the upside from the current $1.62 trading level.
Caxton FX one month forecast:
GBP / EUR 1.12
GBP / USD 1.6350
EUR / USD 1.46
Richard Driver
Senior Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
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