Caxton FX Currency Round-Up: GBP/EUR, GBP/USD

Euro under pressure as ECB indicates cut to deposit interest rates 

The euro has been hit by a few different factors in the past few sessions. ECB President Draghi gave the single currency a knock last Thursday by revealing that whilst there would be no change to the Bank’s policy this month, we might expect some monetary easing next year. From Draghi’s comments, we no longer draw the conclusion that the ECB will cut the headline interest rate in Q1 next year. However, there were real indications that if growth disappoints and eurozone nerves spike in the coming months, we could see a cut to the deposit rate in a bid to encourage banks to step up lending.

Both the ECB and the German central bank (the Bundesbank) have delivered some fairly gloomy growth predictions in the past week. The former now sees the eurozone economy contracting by 0.3% next year, after previously predicting growth of 0.5%. Meanwhile, the Bundesbank disappointingly slashed its forecasts for German growth next year; reducing its June forecast of 1.6% growth to 0.4%.

We have had some good news today on the German front however, with a key economic sentiment survey hitting a seven month high. The latest sentiment and confidence surveys out of Germany suggest the country may narrowly avoid a recession, though a contraction in Q4 2012 looks highly likely. The German economy may not be in as weak as many had expected but the hopes for the rest of the eurozone are rather dimmer. This could well be highlighted by Friday morning’s eurozone PMI growth figures.

Italy hits the headlines as PM Monti announces resignation plans

Technocratic Italian PM Mario Monti dropped a bomb over the weekend by announcing his intention to resign once the Italian parliament has passed its 2013 budget. Berlusconi is waiting in the wings but his approval ratings suggest this is too big a mountain for even him to climb. Nonetheless, this political uncertainty - which raises serious question marks over Italy’s ability to deliver the necessary cuts and economic reforms to keep bond yields stable - could weigh on the euro significantly in the coming weeks and months.

All eyes on US Federal Reserve QE decision

Last week’s surprisingly strong figures from the US labour market are unlikely to satisfy the US Federal Reserve at its meeting over the next two days. We expect the Fed to decide to replace Operation Twist (which is set to be concluded) with a further $40bn in asset purchases, to bring its QE programme up to $80bn per month. There are various tweaks that the Fed can make to its monetary policy, to which the US dollar will respond differently. Given that sterling is trading at a very healthy rate of $1.61 at present, we would urge dollar-buyers to act now.  

End of week forecast

GBP / EUR	1.2450
GBP / USD	1.60
EUR / USD	1.29
GBP / AUD	1.53

Sterling has enjoyed a welcome little recovery against the euro amid some rather negative eurozone developments. At €1.24, we have not abandoned hopes of one last push for €1.25 before the end of the year. There is not much to get excited about with respect to sterling at present but we do expect enthusiasm towards the euro to wane from here. A move below €1.23 is looking increasingly unlikely.

Richard Driver
Currency Analyst 
Caxton FX

Osborne's Autumn Statement

George Osborne provided few surprises in his Autumn Statement earlier today. Growth projections for the UK economy were revised down significantly from over-optimistic figures from the March Budget. Tight credit conditions and external dangers will ensure a rocky recovery for the UK economy over the next few years. One notable success though has been the UK labour market, which has showed some strong improvements this year, with 1.2m extra jobs found under the current government. 

A key theme to take from the Office of Budget Responsibility is that the UK is in a weaker position in terms of both growth and its finances, when compared to the last update in March. This of course highlights the risks of a cut to the UK's AAA credit rating in the early months in 2013. In terms of sterling's performance in reaction to the day's events, the response has actually been pretty muted, which is a pretty good result in the circumstances.

Below is a summary of the key announcements made by George Osborne today.

Economy and Government Spending

·         The Office for Budget Responsibility expects GDP to contract by 0.1% in 2012, significantly down from forecasts of 0.8% growth in March. The OBR then expects the UK economy to grow by 1.2% next year.

·         The government’s fiscal consolidation programme is to be extended by another year to 2017/2018.

·         The UK budget deficit is set to fall from 7.9% last year to 6.9% this year.

·         National debt will not begin falling until 2016-17, a year later than previously expected.

·         UK unemployment is expected to peak at 8.3%, lower than initially expected, and employment is expected to rise every year moving forward.

Taxes

·         There is to be no new tax on property (“mansion tax”).

·         40% tax rate threshold will rise from £41,450 to £41,865 in 2014 and then £42,285 in 2015.

·         Corporation tax will be cut by another 1% in 2014, taking the rate to 21%.

·         Inheritance tax will rise by 1% in 2013.

·         Tax free allowance raise is to rise by £235 to £9,440.

·         Planned 3p rise in fuel duty not just postponed but cancelled.

Benefits and Pensions

·         Most working-age benefits to rise by 1% per year over next three years.

·         Child benefits are also to rise by 1% per year over two years from 2014. 

·         Tax relief on the largest lifetime pensions reduced from £1.5m to £1.25m starting in 2014-15, the annual allowance will now be £40k rather than £50k. 

December Monthly Report: GBP/EUR, GBP/USD

Greece drives euro rally but US fiscal cliff looms

Sterling was broadly unchanged across the exchange rates through November, except unfortunately (depending on your exposure, of course) against the single currency, where a significant decline was seen. We have seen some progress from the eurozone in recent weeks, from Greece in particular. A deal was struck to put the country’s debt on a more sustainable path, one that could give it a realistic chance of emerging out of the current crisis, though this is clearly many years away. Most importantly, the risk of a Greek exit and euro break-up has receded – the key factor behind the euro’s latest rally.

There has been something of a dark cloud hanging over the pound in recent weeks, caused by a mixture of negative UK data and pessimistic growth forecasts from the Bank of England. This in turn filtered into speculation that the UK could lose its AAA credit rating before long.

These factors haven’t stopped the pound from sustaining some very respectable levels against the US dollar however. There has been a marked improvement in growth data from the likes of the US, China and even the eurozone in recent weeks, which in combination with progress in Greece has lifted investor sentiment from a mid-November slump. However, with little progress being made on the US fiscal cliff issue, the dollar could well bounce back before the end of the year.

GBP/EUR

Sterling weak but downside limited despite weak UK data

It has been a difficult few weeks for this pair. The Bank of England brought the market crashing back down to earth with some pessimistic growth projections in the aftermath of the surprisingly strong Q3 UK GDP number (1.0%). Sir Mervyn King & Co have been very deliberate in managing our expectations with respect to the UK economy’s performance in the final quarter of the year, highlighting in the Quarterly Inflation Report that there are significant risks of another contraction.

November’s UK figures certainly didn’t point to a very robust start to Q4, with UK manufacturing sector growth contracting and the services sector giving its worst showing in almost two years. We also saw the worst UK claimant count update in over a year (after a very good few months it must be said).

The recent public sector net borrowing figure came in worse than expected thanks to tax revenues continuing to fall short, which painted a grim picture of George Osborne’s deficit-reduction plan. With Moody’s Investor Service having recently cut France’s AAA credit rating, many in the City are speculating that UK debt will be dealt the same hand before long. There is a high risk that one of the big rating agencies will swing their axe in the UK’s direction in the coming months and this has left its mark on sterling.

It hasn’t been all bad news as far as the pound is concerned. UK inflation ticked higher to 2.7% from 2.3%, which may have discouraged one or two MPC members voting for QE in their November meeting. The minutes from that meeting revealed that in fact only one voter, David Miles, was in favour of extending the BoE’s quantitative easing programme. On balance, we do not expect any further QE from the BoE, which should be supportive of the pound in the longer-term. However, persistently weak UK growth is likely to continue fuelling QE speculation. In addition, the MPC minutes appeared to remove the option of an interest rate cut for the “foreseeable future.”

Greek disaster avoided

 From the eurozone, November was very much Greece’s month. With a deal being struck to avoid an imminent default and bring Greek debt under some recognisable control, the market may be able to put this particular eurozone worry on the backburner to some extent. Nevertheless, there remains a high degree of scepticism towards Greece’s ability to meet its targets and towards a lack of detail within the agreement. We know that Greece will be granted longer to repay its debt and that interest rates on that debt will be lowered. However, it is unclear how the intended bond buy-back (at a discount) will be funded and when it will occur.

Spain has this week made a formal request for its crumbling bailout sector, which is a relief as far as the market is concerned. This isn’t to be confused with a sovereign bailout though and Spain will surely be the subject of the market’s cross hairs once again before long. We don’ think PM Rajoy will be able to avoid requesting a full blown bailout, given the dire state of economic growth and the still elevated borrowing costs that the country is facing (despite recent declines). Any realistic analysis of Spanish growth and debt dynamics over the coming years suggests that a bailout is inevitable.

Concerns over the wider eurozone growth issue in the eurozone have eased somewhat thanks to some recent updates. Germany and France both showed unexpected growth of 0.2% in the third quarter, while Italy contracted by half as much as expected (0.2%).  Nonetheless, we see nothing within the more forward-looking figures (despite the recent upturn in the German business climate) to suggest the eurozone can avoid a recession next year.

Sterling is trading at fairly weak levels around €1.23 at present and we are sticking to our long-term and long-held view that this pair’s upside potential outweighs its downside risks. Our hopes for a move towards €1.25 by the end of the year remain intact and, more importantly, realistic. In the short-term however, there is a strong risk of a move down towards €1.2250.

GBP/USD

Sterling soaring against soft US dollar, but for how long?

This pair’s downtrend has been interrupted in the past fortnight by developments in Greece, which have had a very uplifting effect on market conditions. The avoidance of a messy Greek default and euro-exit saw global equities rally, weakening the US dollar significantly. The $1.60 level has been recovered as a result but as ever we view sterling to be on borrowed time above this psychological threshold.

The US economy continues to show evidence of a strong finish to the year, demonstrated not least by the recent revised GDP figure for Q3, which revealed an annualised growth pace of 2.7%. Consumer confidence continues to climb and we are seeing the US housing and labour markets make further strides.

With the Greek ‘can’ kicked down the road, focus through to the end of the year is likely to be dominated by the US fiscal cliff issue. On January 1^st 2013, a series of sharp US tax rises and spending cuts are scheduled to come into being, unless negotiations between the Democrats and the Republicans bear some fruit in the coming weeks.

The fiscal cliff could as much as half US growth next year and in doing so dent the global recovery considerably; the stakes are extremely high. It is broadly for this reason that we expect US politicians to put some sort of compromise together, in the same way we expected Greek negotiations to produce a deal. Nonetheless, nervousness over this game of ‘chicken,’ which could well go right down to the wire, is likely to lead to increased demand for the safe-haven US dollar in the coming weeks.

Sterling is trading up at $1.61 level, which we view to be an excellent level at which to buy USD. In our view, sterling is highly unlikely to set fresh highs above this pair’s fifteen-month peaks in the $1.6250-1.6270 area. Sterling’s headroom is looking increasingly limited from here and we expect a move lower in the weeks ahead.  

Richard Driver

Currency Analyst

Caxton FX

Will the Reserve Bank of Australia cut interest rates in December?

We expected the Reserve Bank of Australia to cut interest rates at the start of November but Governor Stevens & Co decided to stay put with the 3.25% base rate. In our defence, this was pretty close to a 50:50 call. We still view the RBA as more likely than not to cut the rate by 0.25% in the early hours of next 

Tuesday morning (December 4^th). Of course, there are still clearly risks of another non-event, but in the last few days, the market appears to have come around to our way of thinking.

The minutes from the last RBA meeting were noticeably dovish, despite electing not to cut the interest rate, as indicated by the phrase “members considered that further easing may be appropriate in the period ahead.”

There have been mixed signs in terms of aussie data in the past month. Wage price growth data slowed right down, as did consumer inflation expectations, which both point to monetary easing. However, China’s manufacturing sector grew for the first in 13 months, which has made things a little more complicated.

The slowdown within the recent quarterly private capital expenditure figure has once again strengthened the case for a rate cut, as has this morning’s weak Australian private sector credit data. The decision last time was a close call; these figures should have tipped the balance in favour of a cut.

The peak in the mining boom is fast approaching, while the aussie government remains committed to fiscal tightening. The Australian economy should be in for an early Christmas present next week!

Richard Driver

Currency Analyst 

Caxton FX

Weekly round-up: Greek talks in focus

Markets are nervy ahead of Greek talks

There is a distinctive air of déjà-vu surrounding today’s meeting of the eurozone finance ministers, who for the third meeting in the space of two weeks are grappling with the IMF over Greece’s debt-reduction package, which should unlock the country’s next aid tranche. Talk has emerged this morning that a deal could be delayed until December 3, which would surely weaken the euro. There has been plenty of comment today from eurozone officials, from assertions that a deal today is “probable” to the less convincing “fully possible.” If an agreement does emerge, we expect the euro to benefit further but as it stands the situation remains highly uncertain.

Market confidence that EU officials will do what is necessary to avert a Greek disaster has helped the euro in the past week. Eurozone growth figures were also improved last week, whilst a key gauge of German business climate also impressed and lifted sentiment towards the single currency.

The weekend brought some mixed news from Spain, where in the Catalonian regional elections the separatist parties won but none failed to secure a majority. On balance, PM Rajoy will be relieved that Catalan President Mas’ party failed to secure the mandate to drive for a referendum on independence in the near-term, though with so much support for independence across separatist parties, the story will drag on.

US dollar hurt by positive headlines from across the world

As well as broadly encouraging news from the eurozone (Spain aside), there has been plenty to cheer about globally. A ceasefire in Israel has relieved geopolitical tensions, while the latest positive figures from the US and China have also improved trading conditions. This has seen global equities rally, an environment in which the greenback never trades positively.

The market will surely refocus on the issue of the US fiscal cliff once we can put the Greek negotiations behind us. The latest reports from the fiscal cliff talks have not been positive, so the uncertainty related to this is likely to be the trigger if the USD is to bounce back before the end of the year.   

GBP out of favour as fears of a UK ratings downgrade build

Last week’s public sector net borrowing figure was very disappointing. This, combined with ongoing indications from members of the MPC that we can expect a weak end to the year in terms of GDP, has sparked speculation that the UK’s prized AAA credit rating could fall foul of a cut from the likes of Moody’s. Much of sterling’ demand is down to its safe-haven profile, which is reliant on the UK’s top credit rating. However, the UK deficit is growing, despite ongoing austerity measures and UK growth remains extremely flimsy. Tuesday’s revised UK GDP number for Q3 will be closely watched.

There has been some rather better news for sterling in the form of the MPC minutes, which revealed only one policymaker voted in favour of more QE, whilst a cut to the BoE’s 0.5% base rate was viewed as unlikely in the foreseeable future.

End of week forecast

GBP / EUR	1.2300
GBP / USD	1.6050
EUR / USD	1.3050
GBP / AUD	1.5225

At €1.2350, GBP/EUR is trading at one-month low and we could see further weakness in the short-term. Losses should be limited to around a further cent however. Longer term, we remain confident of a bounce. Sterling has regained the $1.60 level but we do still favour the US dollar moving forward and would view the current level as a strong opportunity to sell the pound.

Why is the South African Rand so weak?

The rand has been on a downtrend for a while now; it was overvalued for a start but political uncertainty has really triggered quite an aggressive depreciation in recent months. Uprisings have sprung up across the country, with the death toll reaching fifty. Mineworkers are particularly prominent within the uprisings, with demands for wage increases the key driver of national anger.

President Zuma is under huge amounts of pressure and will struggle to be re-elected; latest approval rating suggests only 32% support the man in charge. Zuma has given himself a 5.5% pay increase recently – so it’s no surprise that he is under the cosh.

Naturally, this has limited the productivity of the country’s key economic growth contributors, such as its iron ore, platinum, trucking, wine and fruit industries. This is having a material impact on South African growth, GDP expectations have been repeatedly downgraded by the South African Reserve Bank. The outlook is pretty bleak too, with inflation high, unemployment likely to rise and global demand for South African exports likely to decline (particularly from the eurozone).

Unsurprisingly, investor confidence has taken a major hit; the use of armoured vehicles, rubber bullets and tear gas is not conducive to rampant commerce. With investors making for the exit, the rand has plumbed fresh multi-year lows across the exchange rates and with no real sign of the social and political unrest easing up, the rand is likely to remain on its downtrend for at least the next six months to a year. 

Richard Driver

Currency Analyst 

Caxton FX

King's "gloomy" outlook for UK growth hurts sterling

Sterling has had a tough session today on the back of this morning’s Bank of England Quarterly Inflation Report and subsequent press conference with Governor Mervyn King. King and his MPC colleagues were surprisingly pessimistic with respect to near-term UK growth. 

The Q3 UK GDP figure was very impressive - driven by temporary factors like Olympics - but it has been disappointing to see Mervyn King admit today that GDP is likely to contract again in Q4. We knew it would be weaker, significantly so, but we weren't expecting contraction. Beyond this and looking at next year, he expects growth to remain very sluggish, though he does foresee a gradual recovery. Unsurprisingly, the BoE views the eurozone downturn to be the biggest threat to UK growth.  

He does see UK inflation heading higher, which you might think would be positive for the pound given that it would make the Bank of England less inclined to add to its quantitative easing programme. However, when paired with weak growth, market nerves are jangling with respect to the dreaded ‘stagflation’ scenario. 

King said that he “has not lost faith in asset purchases as a policy instrument, nor has it concluded that there will be no more purchases.” This is hardly music to the markets ears and explains to a large degree why sterling has had such a rough session, more QE is not officially off the table as a policy option. However, we remain sceptical that we will see any more QE, at least in the coming months. What the market may have overlooked was King’s warning of the limits to what monetary policy can do to spur growth. We place more weight on this and accordingly, we see GBP/EUR recouping today's lost ground. 

Richard Driver

Currency Analyst

Caxton FX

Caxton FX Weekly Outlook: GBP/EUR/USD.

GBP/EUR recovers the €1.25 level and should head higher

This week’s quarterly inflation report will be very closely watched for an insight into where the MPC is standing with respect to the option of introducing further quantitative easing. Much to the relief of the pound, the committee declined the opportunity to take this measure at its monthly meeting last week. The UK services growth figure for October was disappointing and triggered some speculation that the BoE would take a safety-first approach, but it seems they placed greater weight on the recent positive Q3 UK GDP figure (1.0%).

We think the MPC will be too concerned with upside risks to inflation (which should be highlighted by a tick higher in Tuesday’s monthly CPI figure), backed by an underlying faith that the UK economy is genuinely in recovery mode now. More clarity on this issue will be provided by this week’s major UK data releases; Wednesday brings what is likely to be yet another positive UK labour update, while Thursday’s retail sales figure may provide a little more cause for concern.

A retreat in BoE QE bets has helped sterling to regain a grip on the €1.25 level in recent sessions. Whilst this rate has headed lower than we expected in the aftermath of the ECB’s bond-buying pledge and subsequent period of market relief, we do maintain significantly higher targets for sterling over the coming weeks and months.

US fiscal cliff worries underline positive US dollar outlook

The fiscal cliff issue is really weighing on market sentiment at present. The recent elections maintained the political status quo in the US, which means we are no closer to breaking the deadlock that could deal a major blow to the global economy. Combined with nervousness surrounding Greece and the risks of default, the fiscal cliff issue has boosted the safe-haven US dollar, helping it to rally against both the euro and the dollar in recent sessions. We expect sterling’s downtrend against the greenback to persist in the coming weeks.

Eurozone growth and Greece combine to weaken the euro

The flow of below-par eurozone growth data has been ominously steady this month. Germany appears to be in some real trouble, which is likely to once again be highlighted by Tuesday’s key German economic sentiment survey. Thursday brings a whole raft of eurozone GDP data, which will further highlight the downturn seen in France and Germany in the third quarter, as well as revealing another quarterly contraction for the currency bloc as a whole.

Weak eurozone growth has been put to the bottom of the agenda throughout this year but it is definitely starting to hurt the single currency now, particularly with Germany seemingly being dragged into the quagmire.

Greece is the key eurozone issue hurting the euro at present. We have had some relieving developments in the past week with Greece’s parliament approving major austerity measures as well as more belt-tightening within PM Samaras’ budget for next year.  However, there is still a distinct air of uncertainty in the financial markets over the country’s debt situation and its future within the euro. Realistically, it will take the release of the next €31.5 aid tranche to really ease investor concerns of an imminent disaster. A bond repayment is due on Friday, one which Greece cannot at present afford, so market tensions will remain elevated in the coming sessions.

End of week forecast

GBP / EUR	1.2550
GBP / USD	1.5800
EUR / USD	1.26
GBP / AUD	1.5150

Richard Driver
Currency Analyst
CaxtonFX

Reserve Bank of Australia cuts growth prospects

The news as far as the aussie dollar has been concerned this week has been remarkably positive. We have to hold our hands up and say that we were expecting the RBA to cut its 3.25% interest rate again at its meeting this week, though we did warn that it was an incredibly close call. On top of this, data revealed that 10.7 thousand jobs were added to the Australian labour market, which was away ahead of expectation. The aussie unemployment rate also unexpectedly remained 5.4%.

What followed all this was last night’s RBA monetary policy statement. In it, the RBA warned that the aussie mining boom will peak earlier and at a lower level than has previously been thought. It was previously thought that the mining boom would peak at 9.0% of GDP, expectations are that it will now peak at 8.0%. The central bank also complained further about the strength of the Australian dollar (change the record!)and proceeded to downgrade aussie GDP projections for this year from around 3.00% to around 2.75%, though admittedly we might have expected this downgrade to be more drastic.

The RBA stated that the current interest rate is appropriate and that past rate cuts are still filtering through and benefiting the Australian economy. The statement also sounded confident that the Chinese economy has stabilised, anticipating a gradual recovery in growth from here.

We suspect that Governor Stevens may be getting ahead of himself with respect to Chinese growth and Australian growth. While this week’s strong aussie jobs data may see the RBA delay a rate cut in December, we’d be surprised if we had to wait past January for another cut. 

Richard Driver,

Currency Analyst

Caxton FX

Sterling rallies on BoE's "no QE" decision

The Bank of England has today decided against adding to its asset purchase facility (quantitative easing programme), which remains at £375 billion. The result has been some further support for the pound, so cleary there were some lingering suspicions that the MPC doves would do enough to persuade a majority to vote in favour of QE. The BoE base rate also remains at 0.50%, though this was universally expected.

Despite disappointing updates from the UK services and manufacturing sectors in the past week, the MPC was always likely to hold fire on the issue of further QE this month. The UK GDP figure for Q3 would have firmed up several MPC members’ positions and from the comments emanating from the committee, several members doubt not only the need for further QE but the capacity of the measure to actually make a material impact. In addition the BoE thinks that the 2.0% inflation target will be hit regardless of more QE, due to persistently high inflation.

Whether or not the BoE will decide that further QE is necessary in the coming months really depends on whether the recovery that was indicated in Q3 materialises. QE should be seen as an emergency measure and UK data has revealed a slight uptrend of late, so it really wasn’t necessary in the absence of any fresh shockwaves. If the debt crisis or the eurozone downturn drags the UK back into a triple-dip recession then there is little doubt that the BoE will once again come to the rescue. As it stands though, its case of wait and see how this recovery progresses. 

Richard Driver

Currency Analyst

Caxton FX

Weak growth outlook hurting the euro today

How quickly the market has moved on from President Obama’s re-election! Focus is back squarely on the eurozone and sterling has enjoyed another nudge higher against the euro as the latter has been sold-off quite aggressively.

What’s behind this fresh euro-weakness? German industrial production data for the month of September has come in at an alarming -1.8% this morning, which represents a five-month low. To make things worse, eurozone retail sales data also revealed an unexpected contraction this morning.

The EU Commission has also added extra weight to the single currency, by releasing pessimistic growth forecasts for the eurozone.  It sees eurozone GDP shrinking by 0.4% this year, before growing by just 0.1% next year. Greece is to contract by a staggering 6.0% this year and by another 4.2% next year. EU Commissioner Rehn sounded distinctly downbeat in his press conference today, citing tightening credit conditions and weakening demand.

GBP/EUR climbed to a five-week high of €1.2530, whilst EUR/USD fell to nearly a two-month low of $1.2735. We have been citing downside risks to the euro on the basis of the eurozone’s dire economic outlook for some time now. The increasing evidence of Germany’s decline is making the market stand up and take notice. Watch out for tonight’s Greek austerity vote, as the euro could get some relief if, as it should do (though only just), the Greek parliament approves the latest austerity proposals. 

Richard Driver,

Currency Analyst

Caxton FX

November Outlook: Euro set to decline

After some weak figures from the UK economy to kick October off, we have enjoyed a pretty steady flow of positive domestic news. The highlight has been the recent preliminary UK GDP figure for Q3, which indicated growth of 1.0%, almost doubling expectations. With headlines surrounding the UK economy’s emergence from recession, sterling has enjoyed some renewed interest, though with domestic growth so far this year almost completely flat, you don’t have to look far to find the sceptics.

As far as the US economy is concerned, conditions are certainly perking up. The recent advance US GDP figure for Q3 revealed annualised growth of 2.0%, so it was a case of anything the UK can do, the US can do better.  The Fed will also be encouraged by significant improvements in the US labour market. It appears that the recovery of the world’s No.1 economy from its mid-year slump, albeit later than expected, is well under way. Nonetheless, the risk of the US fiscal cliff continues to pose serious threats to US and indeed global growth in 2013.

It has been fairly quiet on the eurozone front in recent weeks. Spain remains frustratingly tight-lipped on the issue of a bailout request. However, we are heading into a crucial week in which the Greek parliament will decide whether or not to approve an austerity package that is essential to the release of the country’s next tranche of aid.

GBP/EUR

Sterling benefits as UK exits recession

Sterling spent much of October under pressure against the euro, with no major panic headlines emerging out of the debt crisis. Disappointing domestic data also kept sterling pinned well below the €1.25 level for long periods, with the services, construction and manufacturing sector updates all disappointing.

However, we have seen a decent turnaround in figures in the past fortnight or so, which has provided sterling with renewed support. The labour market continues to make impressive strides, as shown by the unexpected dip in the UK unemployment rate to a 13-month low of 7.9%, while retail sales were also in good shape in September. These figures were topped off by a 1.0% preliminary UK GDP figure, which was well above the 0.6% estimates that were prevailing in the build-up. With the data revealing that the negative growth that dominated the first half of the year has been recouped, the UK government enjoyed a rare sigh of relief.

MPC to vote against QE this month

This all leaves the Bank of England interestingly poised in terms of its next move. MPC members have been quick to warn that we can expect a much weaker growth figure from the fourth quarter, once the temporary factors of the Olympics and the bounce back from the extra Q2 Jubilee bank holiday are discounted. However, judging by the minutes from last month’s MPC meeting, not only is the MPC split on the desirability of another dose of quantitative easing, but there appears to be plenty of scepticsm with respect to the usefulness of such a move. In addition, there have been hints that the government’s Funding for Lending initiative, where bank lending is incentivised, is making a real difference.

There is plenty of reason to suspect that last quarter’s GDP figure was a temporary surge for an economy that still needs nurturing back to health. The latest updates from the services sector suggests the UK has made a soft start to Q4 but we nevertheless expect the MPC doves to fail to muster a majority vote in favour of QE this week.

Greece vote gets euro nerves jangling again

As far as the euro is concerned, focus has centred on the familiar issues of Greece, Spain and deteriorating eurozone growth. Greece will dominate the eurozone headlines this week, with PM Samaras presenting a controversial package of fresh austerity measures which will be voted on by the Greek parliament later this week. The vote will come right down to the wire, though we are expecting the package to be approved.

We are sticking to the ‘muddling through” assumption that Greece will do what is demanded of it and in turn will receive some concessions, along the lines of lower interest rates, extended loan maturities and extended austerity deadlines. The stakes are simply too high to allow the Greek saga to blow up again.

With Spanish bond yields coming away from the dangerous 7.0% mark in the aftermath of ECB President Draghi’s pledge to buy up unlimited peripheral debt, the pressure on PM Rajoy to request a bailout has eased somewhat. However, the market is likely to take an increasingly dim view of Rajoy’s ongoing procrastination through November (talk has emerged that he will wait until next year). Ratings agency Moody’s handed Spain some breathing space last month, sparing it the blow of downgrading its debt to ‘junk’ status but there is little doubt it will wield its axe once again if progress fails to emerge.

As ever, major concerns are stemming from the deteriorating state of eurozone growth, as the region is dealt round after round of austerity. Whilst the ECB now looks set to hold off from cutting interest rates until next year, declining demand from peripheral eurozone nations continues to filter into weakness in the eurozone’s core. German figures were yet again poor in October, compounding fears that the powerhouse economy is heading into recession. The region’s declining economy is really showing few bright spots, while the headlines out of the UK economy contrastingly highlight its re-emergence from recession.

Sterling is trading just below the key €1.25 (80p) level and direction from here over the coming weeks will really depend on whether the pound can make a sustained move north of this benchmark. We can’t discount another move back down towards €1.23 but we maintain expectations for this pair to move above €1.25 in the coming weeks.

GBP/USD

Dollar to benefit from upturn in US growth

Sterling has traded very positively against the USD in recent weeks but has finally suffered a downward correction in the past week. GBP/USD is still only a couple of cents off April’s multi-month highs above $1.62 with stronger UK data and diminishing risks of QE providing the pound with plenty of support at $1.60, just when a move back down to the $1.50s has looked on the cards.

The USD is attracting increased demand at present on the back of some strong US economic figures. The US unemployment rate fell to 7.8% in September, the lowest level seen in almost four years (though this bounced up to 7.9% in October). The advance US GDP figure for the third quarter came in above expectations at 2.0% (annualised), powered by a surge in consumer spending and a temporary boost from defence spending. November’s excellent employment update, suggests we can expect further improvements over Q4.

Global concerns to highlight dollar’s safe-haven status

With the fiscal cliff a month closer, so too are the risks of a massive hit to US growth. This in our view will increase appetite for the safe-haven US dollar as we approach year-end. Meanwhile, we are struggling for progress on the Spanish debt/growth problem and broader concerns with global growth should also underpin the greenback.

Whilst the US Federal Reserve is engaging in QE3, the US economy is still outpacing the UK by some distance and we believe this will soon be reflected in some dollar strength. The UK’s last GDP figure may have been impressive (1.0% in Q3) but looking at the year to date, growth has essentially flat lined and with the eurozone recession deepening, major risks to domestic growth remain.

This week’s US Presidential election makes short-term swings highly probable and highly unpredictable. Not only is it unclear how the dollar will react to whoever wins but there is also the issue of which party will control Congress. Our conservative bet is that the status quo will broadly remain, with Obama emerging victorious but with doubts remaining over his ability to strike a deal to avert the fiscal cliff. We maintain our position that that we will see this pair spend most of the rest of the year below $1.60. Sterling’s two-month low of $1.5920 should be tested soon and we believe this will ultimately be broken, paving the way for move back into the mid-$1.50s.

1-month Outlook

GBP/USD:  1.58

GBP/EUR: 1.2550

EUR/USD: 1.26

Richard Driver 

Currency Analyst

Caxton FX

Caxton FX Weekly Outlook: GBP/EUR/USD

UK GDP figure strong but reality check could be around the corner

Last week’s Q3 UK GDP figure beat expectations by some distance (1.0% vs 0.6%), which triggered plenty of sterling demand. The boost from the Olympics and the natural rebound from the extra bank holiday that weighed on growth in the second quarter suggest that the economy has recouped the 0.9% contraction that we saw in the first half of the year.

The much better than expected GDP figure is certainly good news but if we take a step back, the truth is that the UK economy has done little more than flat line in 2012 so far. Since the release, MPC members have been quick to manage our expectations for Q4. Indeed, we are likely to see some weak growth figures in the week ahead in the form of the monthly updates from the UK manufacturing and construction sectors, which threatens to knock the pound off its perch against the dollar in particular.

Despite the scepticism with which many are looking upon the GDP figure, we do see it as likely to convince the BoE not to announce another round of QE at its monthly meeting next week. Whilst there is clearly a pro-QE voice within the MPC, we just doubt that the doves will be able to form a majority next week.

US growth in better shape ahead of key monthly employment data

Friday brings October’s US non-farm payrolls figure, which is expected to show some further modest improvement. This, in combination with last week’s forecast-beating US GDP figure (which indicated that the US economy grew at an annualized pace of 2.0% in Q3) may well give global stock markets a lift, taking away some demand from the safe-haven US dollar. As things stand however, fears over Hurricane Sandy have instilled in the markets a distinctly cautious tone at the start of this week, which has kept the EUR/USD pair pinned down below $1.30.

The US dollar has certainly been on the ascendancy in the past week, as frustrations over a lack of progress in Spain and Greece have set in. The former country appears no closer to requesting a bailout, something which is clearly testing the markets’ patience by the look of rising Spanish bond yields. Also weighing on the euro last week were some very disappointing German economic figures – this weak growth story running behind the debt crisis is a key driver behind our negative outlook for the euro in the coming months. We have had some poor German employment data out this morning, which has been a source of concern, though the euro has been given a helping hand today by a positive Italian bond auction.

End of week forecast

GBP / EUR	1.2400
GBP / USD	1.5950
EUR / USD	1.2860
GBP / AUD	1.5550

Sterling is trading at €1.24 this morning and faces a difficult end to the week in the form of domestic growth data at the end of the week. We see EUR/USD paring back from its current $1.2950 level, which should help GBP/EUR fall no lower than €1.2350. We still fancy a move above €1.25 in the coming month or so, which could actually bring a move significantly higher into sight provided the BoE holds off from further QE.

GBP/USD’s rallies are running out of steam at early stages and a sustained move below $1.60 is still our best bet.

Richard Driver
Currency Analyst
Caxton FX

US GDP beats expectations but dollar fails to rally

US GDP data has impressed this afternoon, revealing that the world’s number one economy grew by 2.0% in the third quarter, ahead of market expectations in the 1.8 -1.9% area. This is just a preliminary reading but good news nonetheless.

A temporary surge in defence spending appears responsible for the figure’s stronger than expected showing, though this is unlikely to be sustained. What is good to see is that conditions in the US housing market are improving, as is consumer spending. We know that the US labour market is also seeing some progress, though data next Friday will reveal whether last month's improvements were a flash in the pan.

On the downside, US business investment is on the wane for the first time since Q1 2011. This really does suggest that concerns over the US fiscal cliff, which could do as much as halve US growth next year, are weighing on US confidence.

The UK economy grew by 1.0% in Q3, according to preliminary data released yesterday. This was considerably better than expected and triggered a much more noticeable reaction in the FX markets, with sterling making impressive gains as a result. The dollar has failed to capitalise on today’s data; it has had the effect of lifting market confidence and reducing demand for the safe-haven dollar. Nonetheless, the dollar has had a strong week regardless and we maintain a pretty rosy outlook for the greenback. The next big event, as far as the US is concerned, is the Presidential election result. The jury is out over whether a red or a blue victory would be best/worst for the greenback. 

Richard Driver

Currency Analyst

Caxton FX

Germany succumbing to peripheral eurozone weakness

Today’s session has seen some nasty eurozone growth data emerge, which has put the euro under even more selling pressure. Yesterday’s was a tough enough session for the single currency thanks to Moody’s credit downgrade to five Spanish regions; sterling/euro has helped itself to some very welcome gains again today.

Attention as far as the euro has been concerned has been focused on Spain’s “imminent” bailout request and Greece’s slow progress towards an agreement on further austerity measures that will unlock the next tranche of aid. Focus switched back to economic fundamentals today, which is not an environment in which the euro has thrived in recent months thanks to the regional downturn in economic growth. Brutal austerity measures throughout the eurozone periphery are not just hurting those struggling economies, the weakening demand is hitting the eurozone’s core, as shown by today’s German and French growth data.

September’s German manufacturing data suggested the weakness we have seen in the sector this year had bottomed out but October’s downturn casts a shadow over this theory. France’s manufacturing number came in below expectations, as did that of the German services sector.

A key gauge of the German business climate showed a sixth consecutive monthly decline, giving its worst showing since March 2010. What is interesting is that Ifo, the institute which produces the business climate survey, does not see any need for the European Central Bank to cut interest rates and does not see Germany heading into recession.

We are rather more bearish on the prospects of the European powerhouse. The composite measure of eurozone output has fallen to a 40-month low and points to an even sharper contraction in Q4 compared with Q3. Germany’s resilience to the eurozone region’s decline is a thing of the past and we are expecting a rate cut from the ECB in the coming months. The ECB might be doing its bit to ease concerns over eurozone contagion and a break-up, but growth in the region is crying out for help. 

Richard Driver

Currency Analyst

Caxton FX

Caxton FX Weekly Outlook: UK GDP needs to be firm

Sterling kept out in the cold despite host of strong UK figures

It was a good news week as far as the UK economy was concerned last week. We saw some more positive UK labour data; the unemployment rate dropped 7.9%, which is the lowest seen in over a year. Meanwhile, there were four thousand less jobless claimants; the improvements being seen in the domestic labour market are being sustained far beyond what many had expected.

UK retail sales data was also stronger than expected last week, while the public sector net borrowing figure also revealed that the government borrowed the least in the month of September since 2008. The chances are that Osborne will still miss his deficit-reduction targets but things appear not to be as bad as once feared.

Another development last week, which should have been positive for the pound, was a rather less dovish MPC minutes than expected. There appears to be a clear dovish voice within the MPC, led by David Miles, but there is no doubt that there are plenty in the nine-member committee who doubt that the UK economy needs a further dose of quantitative easing. Better still for the pound was the skepticism of some MPC members that more QE would actually be of any real practical benefit. Mervyn King speaks this evening and will perhaps provide some further clues. UK inflation has dropped to almost a three-year low, which is not exactly supportive of the pound but it was quite surprising to see the market ignore last week’s slew of genuinely upbeat economic figures. This week brings the long-awaited preliminary UK GDP figure for the third quarter; a showing of 0.6% is the consensus expectation, which should give the pound some belated support.

EU Summit hardly set the market on fire

It won’t come as much of a shock to learn that last week’s EU Summit yielded little by way of ground-breaking progress on the eurozone’s various debt issues. Merkel even said herself that this wasn’t a Summit where decisions would be made, rather it would pave the way for decisions to be made in December. Headlines focused around the banking union, which is expected to come into being at some point next year, but there was little to get excited about. Market nerves continue to ease though, as demonstrated by declines in Spanish bond yields, despite the fact that we remain in the dark with respect to the timing of bailout request from PM Rajoy.

There is plenty of eurozone growth data to keep an eye on this week, with investors possibly most concerned with conditions in Germany. A key gauge of the German business climate was surprisingly weak last time around and Wednesday morning should shed further light on this issue.

The euro has made a soft start to Tuesday’s session; Greece has stated that a deal must be reached on a €13.5bn package of cuts by Wednesday night, while Moody’s has downgraded five Spanish banks. This has helped sterling climb half a cent above its 5 ½ month lows of €1.2250. EUR/USD has also fallen to $1.30, which should see plenty of euro-buyers return in the short-term.

Sterling has lost grip of the $1.60 level this morning, a development we have anticipated for a while, though we have had to be patient. It now trades at a six week low of $1.5990 and direction from here all depends on what happens to the EUR/USD pair. Our base line scenario is for further losses for both pairs this week.  

End of week forecast

GBP / EUR	1.2325
GBP / USD	1.5975
EUR / USD	1.2950
GBP / AUD	1.5675
Richard Driver Currency Analyst Caxton FX

MPC minutes suggest dovish majority in November

This morning’s MPC minutes release and UK employment figures brought some positive news for sterling, even if this didn’t translate in to any real demand for the currency today. The MPC minutes were not as dovish as they could have been, bearing in mind September’s update from the UK services, construction and manufacturing sectors were very disappointing. Meanwhile this morning’s UK unemployment figures beat expectations considerably, providing further optimism for a positive Q3 GDP figure on October 25.

The minutes revealed that there are clearly differing views within the MPC. Whilst no members voted for more QE in October, there are very likely to be members in favour of more QE in November. However, the MPC minutes and various speeches from members like Martin Weale and others such as Broadbent and Dale, reveal that there are plenty who doubt the need and indeed the actual usefulness of more QE.

Based on these minutes, it seems unlikely that the MPC doves will be able to form a majority in favour of QE in November. Martin Weale’s reservations over whether more QE is in line with the Bank’s inflation target could well convince some of the fence-sitters to hold fire on QE, as could the early indications that the Funding for Lending Scheme is stimulating credit conditions. Next week’s UK GDP figure could well have the final say for several voters.

Today’s UK employment figures have positive implications for the upcoming GDP figure. With the jobless rate dropping unexpectedly down to 7.9%, UK unemployment is at its lowest level since June 2011. The government will take a huge amount of comfort in the ongoing uptrend we are seeing in the UK labour market.

Richard Driver,

Currency Analyst

Caxton FX

What can we take from the RBA minutes?

Last night’s Reserve Bank of Australia minutes were unsurprisingly dovish given the downturn in Chinese and global growth over the past few weeks and months. The minutes explained the key drivers behind the central bank’s decision to cut interest rates at its meeting earlier this month. As well as slower growth in Asia, lower commodity prices and weaker domestic growth also topped the RBA’s list of concerns. The bank is now envisaging a peak in resource investment, sooner and lower than initially estimated.

An ongoing decline in coal coking prices is alarming the RBA and there are reports of early closures of older mines and low take-up of new resource projects. The mining boom has been a huge driver of Australian growth in recent years and these tell-tale signs of decline are bad news for the economy and the AUD as a result. Weakening demand from the eurozone is clearly taking its toll on Chinese growth and the knock-on effect is weaker demand for Australian commodities.

The RBA is also very concerned about the aussie labour market. We have had a decent Australian employment update this month but the unemployment rate has climbed up to two-year high of 5.4% and the central bank is anticipating a deterioration in the coming months, in no small more part due to projected mining sector weakness. The mining sector has masked underlying weakness in the labour market for a while now, the truth should now emerge. 

Australian Treasurer Swan indicated last month concerns over a fall in Australian tax receipts, while the Government is committed to returning to a budget surplus. The difference is being made up in budget cuts, which will also weigh on Australian growth in the coming months.

Amid all these downside risks to Australian growth and the noticeably dovish tone in these latest RBA minutes, we are expecting another interest rate cut at the RBA’s next meeting in November. October 24 brings a key quarterly Australian inflation figure but an upside surprise does seem very unlikely and the path should be clear for another rate cut. This leaves plenty of scope for AUD-weakness in the coming weeks and months. 

Richard Driver

Currency Analyst 

Caxton FX

Caxton FX Weekly Round-Up: GBP, EUR, USD

Standard and Poor's cuts Spanish credit rating but Rajoy still delaying 

Rating agency Standard and Poor’s cut Spain’s credit rating by another two notches last week, which puts the country’s debt only one notch above ‘junk’ status. Moody’s already has Spain at this level but when it publishes its report in a fortnight, the market response could be very negative indeed if it does in fact downgrade Spain to junk territory. Speculation that Standard and Poor's axe wielding would prompt an aid request from Spain intensified last week but the latest reports suggest that not only will Rajoy wait until after regional elections on October 21 but he will wait until November before officially requesting a bailout. More delay then, though at least we have an idea of timescales.

Interestingly though, Spain’s bailout looks set to become part of a larger package containing a bailout for Cyprus and an amended loan package for Greece. This will relieve EU officials of the requirement to repeatedly obtain approval from the eurozone’s national parliaments. In terms of the eurozone’s other key problem child, a Greek deal on a new austerity package is likely to be agreed in time for this week’s EU Summit, which should help to set market nerves at rest with respect to the next tranche of Greek aid.

In terms of eurozone data this week ,we have a key German economic sentiment gauge released on Tuesday, which looks likely to improve slightly, though probably not enough to trigger any rally for the euro.

Big week of UK announcements ahead 

Last week brought a lull in terms of UK news. We learnt UK manufacturing production underperformed in August and that the UK trade deficit widened quite dramatically, but the week ahead brings plenty of key domestic figures. UK inflation is set to take another sharp downturn, which could well embolden the more dovish members of the MPC to vote for more QE next month. The minutes from the last MPC meeting are also released on Wednesday, which may be slightly more downbeat based on September’s weak PMI growth figures. This could potentially hurt the pound if it is enough to convince investors that a few members will be swayed to vote for more QE in November.

UK labour data looks set to be solid again on Wednesday, while we should also see some better growth from the UK retail sector. The market will watch all these figures closely but one eye will be kept on next week’s (October 25) initial Q3 UK GDP estimate. This is the next major event for sterling this month.

We are expecting plenty of range-bound trading this week, with EU leaders set to put off major announcements until next month. Having failed once again ahead of $1.61, GBP/USD looks set to return to the $1.60 level. We are sticking to our guns in terms of our predictions that when this pair does finally make a sustained break away from the $1.60 level, it will be to the downside. The euro continues to look tired as it approaches the $1.30 level and a dip below $1.29 looks possible this week.

Sterling is struggling to sustain any significant gains against the euro. We expect the €1.2350 will provide plenty of support in the sessions to come, so we’d view current levels to strong ones at which to sell the euro. A break higher back up towards €1.26 isn’t out of the question this month.

End of week forecast
GBP / EUR 1.2450
GBP / USD 1.5975
EUR / USD 1.2850
GBP / AUD 1.5800

Richard Driver
Currency Analyst
Caxton FX

What the fiscal cliff could mean for the US and global economy

With the US fiscal cliff less than three months away, the International Monetary Fund has chimed in this week with its concerns for both the US and the global economy as a whole. The US is edging towards an enormous fiscal tightening the like of which we haven’t seen since 1947. The nerves, pressure and speculation surrounding the issue will only going to intensify as US politicians argue and stall their way through the final quarter of the year.

The IMF has estimated that if a deal isn’t reached to avoid a full-blown fiscal cliff, then the US could well plunge into recession next year. The organisation estimates that the US economy will grow by 2.1% in 2013, while the impact of the fiscal cliff would weigh on GDP by 2.2%.

While the fiscal cliff does not appear to threaten a global recession next year, it would certainly have a significant impact; rating agency Fitch has estimated that it would cut global growth in half. As far as eurozone growth is concerned, developments from within the region could easily tip the IMF’s 2013 eurozone GDP forecast of 0.2% well and truly into recession territory regardless of the fiscal cliff. However, the organisation sees the failure to reach a compromise on the fiscal cliff knocking 0.4% off growth, which would seal the deal regardless.

If an agreement between the Republican controlled Congress and Democrat controlled Senate, it is highly unlikely that the payroll tax cut will be extended - there appears to be consensus on this issue. The expiration of this tax cut then will likely shave 1.0% off US GDP, which is nearly half the amount that the IMF is estimating of a full-blown fiscal cliff. This would leave global growth down around 2.6% in 2013, instead of the 3.6% the IMF is anticipating on the assumption a deal is reached. Unless US politicians pull a rabbit out of their collective hat, the fiscal cliff issue is likely to end in pain for all concerned, just how much pain is the real question.

Richard Driver

Currency Analyst

Caxton FX