UK enters a technical recession but sterling still flying high
The preliminary reading of the UK’s Q1 GDP figure came in last week to reveal a 0.2% contraction, which triggered a wave of headlines regarding the UK economy having entered a double-dip recession. Still though, the pound is on the offensive across the board, which is really a reflection of its growing safe-haven demand.
There is widespread scepticism with regard to the latest GDP figure and many, including us, are expecting an upward revision towards the end of May. What’s more, the figure does little to change the Bank of England’s monetary policy outlook as the MPC had already recognized the risks of Q1 contraction and appear confident that growth will pick up this year. The UK government’s response has been to reaffirm its unwavering commitment to keep the UK’s international borrowing costs low through ongoing austerity measures - a popular stance with the market.
The UK’s monthly set of growth figures will roll out over the next few days and readings of the manufacturing, construction and services sector are expected to show a slowdown. Judging by the performance of sterling in the past fortnight though, next Thursday’s BoE quantitative easing decision represents the next major domestic risk event. The MPC is likely to remain in wait and see mode next week, regardless of the UK’s economic slump in the past three months.
US growth slows down to strengthen Bernanke’s dovish position
The first quarter US GDP figure came in at 2.2% (annualized) last week, well below the 2.6% reading that was anticipated. Whilst clearly outpacing the UK economy, this slowdown is playing into the hands of the more dovish members of the US Federal Reserve, particularly Chairman Ben Bernanke. Bernanke stated that US monetary policy is “more or less in the right place” at the moment and interest rate hikes aren’t expected for at least another couple of years. However, Bernanke has once again emphasized that the door remains well and truly open to a third round of quantitative easing and it is this factor that continues to hurt the US dollar.
This Friday brings the monthly US non-farm payrolls figure, the most important indicator of growth in the world’s leading economy. A weaker number is expected, so it is unlikely that the US dollar, in the short-term, will return to strength on the basis of domestic economic strength. However, the US dollar will remain a safe-haven target if eurozone nerves jangle again, as they may well do as the weekend approaches.
French and Greek elections come into focus
Eurozone jitters are likely to increase ahead of the weekend’s final French and Greek elections. Sarkozy’s rival Hollande is looking favourite to win the French presidential election, while there is chance that Greece’s two major parties (the current coalition) will fail to secure a majority. Amid this huge political uncertainty, we may well see the euro struggle this week.
Sterling is trading up towards €1.23 this week, which is the result of a 2.5% climb for this pair in the past month. Further gains for GBP/EUR look probable. Sterling is trading marginally off an eight-month high of $1.63, which is still an excellent level at which to purchase USD. There may be room for a little more upside in the short-term but a weaker EUR/USD should eventually drag on GBP/USD.
End of week forecast
GBP / EUR 1.24
GBP / USD 1.6350
EUR / USD 1.31
GBP / AUD 1.57
Richard Driver
Currency Analyst
Caxton FX
Monday 30 April 2012
Tuesday 24 April 2012
Caxton FX Weekly Round-up: Sterling Rallies
IMF boost emergency fund by $430bn but EUR remains pressurized
The weekend’s IMF and G20 meetings produced some real progress in the form of a combined $430bn of additional loans, to be used in the event of a deterioration of the eurozone debt crisis. Good news then, but Spanish 10-year bond yields are trading around the dangerous 6.00% level, and Italy’s equivalent debt is yielding 5.75% today, so it clear that the market remains characteristically skeptical.
The French presidential elections have increased the pressure being felt by the euro in recent sessions. Socialist candidate Francois Hollande received the most votes in the weekend’s initial round of voting and the euro, as well as European equities, has declined as a result. The final election will be held on May 6th and this political uncertainty is likely to weigh on the single currency in the meantime. The markets would probably prefer Sarkozy to remain in power, thus reducing the risk of a breakdown in cooperation between France and Germany on dealing with the debt crisis. Fresh concerns have also sprung up with respect to the Netherlands, which is likely to hold elections in light of the government’s collapse after failing to agree measures to slash its budget deficit.
As well as the weekend’s political concerns, the markets have had to digest some further disappointing eurozone economic data. A German manufacturing growth figure hit almost a three year low and figures out of the eurozone as a whole were equally alarming.
MPC's Posen gives sterling a boost
Sterling enjoyed a staggeringly strong week last week and has started the current one where it left off. MPC policymaker Adam Posen provided the main catalyst for the rally, with the minutes from the MPC’s April meeting revealing that he did not vote for further quantitative easing. The market may have got ahead of itself in pricing out the likelihood of further BoE quantitative easing. Posen may well have voted for no change due to the recent uptick in inflation and may have just preferred to see the current round of QE run its course (which it will have done by time of the MPC’s next meeting in early May). More monetary easing from the BoE is still a distinct possibility if UK inflation eases in the second half of the year and economic growth remains stagnant.
UK Q1 GDP figure to show some growth, albeit scant
Wednesday brings the release of the first quarter UK GDP figure. After last week’s excellent UK retail sales figure, we are fairly confident that we will not see another quarterly contraction. Estimates are falling around the 0.1% growth level, which is indicative of the uncertain footing from which the UK economy is building. Nonetheless, news that the UK has avoided a technical recession will be welcome (though the risks of disappointment are not insignificant).
Sterling is trading at almost a six-month high of $1.6150 at present and we continue to view these to be excellent levels at which to sell the pound. The Fed is likely to be more hawkish in its communiqué this week, whilst the US GDP figure is also likely to be impressive, which could well help the US dollar bounce back. Sterling is trading at almost a two-year high against the euro above €1.2250 and further gains are looking likely, though we may see upward progress stall as nerves kick in ahead of Wednesday’s GDP figure.
End of week forecast
GBP / EUR 1.23
GBP / USD 1.6050
EUR / USD 1.3050
GBP / AUD 1.5750
Richard Driver
Currency Analyst
Caxton FX
The weekend’s IMF and G20 meetings produced some real progress in the form of a combined $430bn of additional loans, to be used in the event of a deterioration of the eurozone debt crisis. Good news then, but Spanish 10-year bond yields are trading around the dangerous 6.00% level, and Italy’s equivalent debt is yielding 5.75% today, so it clear that the market remains characteristically skeptical.
The French presidential elections have increased the pressure being felt by the euro in recent sessions. Socialist candidate Francois Hollande received the most votes in the weekend’s initial round of voting and the euro, as well as European equities, has declined as a result. The final election will be held on May 6th and this political uncertainty is likely to weigh on the single currency in the meantime. The markets would probably prefer Sarkozy to remain in power, thus reducing the risk of a breakdown in cooperation between France and Germany on dealing with the debt crisis. Fresh concerns have also sprung up with respect to the Netherlands, which is likely to hold elections in light of the government’s collapse after failing to agree measures to slash its budget deficit.
As well as the weekend’s political concerns, the markets have had to digest some further disappointing eurozone economic data. A German manufacturing growth figure hit almost a three year low and figures out of the eurozone as a whole were equally alarming.
MPC's Posen gives sterling a boost
Sterling enjoyed a staggeringly strong week last week and has started the current one where it left off. MPC policymaker Adam Posen provided the main catalyst for the rally, with the minutes from the MPC’s April meeting revealing that he did not vote for further quantitative easing. The market may have got ahead of itself in pricing out the likelihood of further BoE quantitative easing. Posen may well have voted for no change due to the recent uptick in inflation and may have just preferred to see the current round of QE run its course (which it will have done by time of the MPC’s next meeting in early May). More monetary easing from the BoE is still a distinct possibility if UK inflation eases in the second half of the year and economic growth remains stagnant.
UK Q1 GDP figure to show some growth, albeit scant
Wednesday brings the release of the first quarter UK GDP figure. After last week’s excellent UK retail sales figure, we are fairly confident that we will not see another quarterly contraction. Estimates are falling around the 0.1% growth level, which is indicative of the uncertain footing from which the UK economy is building. Nonetheless, news that the UK has avoided a technical recession will be welcome (though the risks of disappointment are not insignificant).
Sterling is trading at almost a six-month high of $1.6150 at present and we continue to view these to be excellent levels at which to sell the pound. The Fed is likely to be more hawkish in its communiqué this week, whilst the US GDP figure is also likely to be impressive, which could well help the US dollar bounce back. Sterling is trading at almost a two-year high against the euro above €1.2250 and further gains are looking likely, though we may see upward progress stall as nerves kick in ahead of Wednesday’s GDP figure.
End of week forecast
GBP / EUR 1.23
GBP / USD 1.6050
EUR / USD 1.3050
GBP / AUD 1.5750
Richard Driver
Currency Analyst
Caxton FX
Friday 20 April 2012
Less Dovish MPC Minutes Give Sterling a Major Boost
The recent release of the MPC minutes has given the pound an excellent boost. Adam Posen, the policymaker who has so often stood alone as the Bank of England’s arch dove, has seemingly abandoned his quest for further quantitative easing. Two votes became one in the MPC’s April meeting then, with only David Miles seeing fit to vote for a further £25bn in asset-purchases, though he stressed the decision was “finely balanced.”
The last quarterly inflation report assumed a fairly steady downtrend in UK inflation but the MPC is now noting higher medium-term inflation risks, which reduces the attractiveness of further QE. Higher inflation requires tighter monetary policy. For David Miles, the threat of a third consecutive decline in UK growth and another technical recession looms too large and he voted for extra £25bn of QE accordingly. Clearly, next week’s Q1 UK GDP figure will be crucial and the risks of another negative reading are not insignificant. However, April’s PMI surveys from the UK’s manufacturing, construction and services sectors were very encouraging and the recent UK labour statistics also provide room for optimism. The recent UK retail sales figure, which revealed stunning 1.8% growth in March, should ensure a positive GDP number on April 25th.
The BoE does appear to be moving away further monetary easing at present but the UK economy remains distinctly fragile. Many market players will be assuming further QE is now off the table but if inflation eases towards the end of the year and growth remains weak, dovish arguments will once again come to the fore. What’s more, the eurozone debt crisis could force the BoE’s hand if the situation in Spain and Italy deteriorates rapidly.
There is also the issue of Adam Posen’s thinking – whether he has really given up on more asset-purchases. Posen has indicated that he merely saw fit to let the current round of QE run its course. Posen will be able to reassess the need for a top-up in May, by which time the BoE’s inflation projections will have been formally updated and we will know whether the British economy has suffered the dreaded ‘double-dip.’ Only time will tell on this issue, but it’s fair to say the market may have jumped the gun in respect to Posen’s ‘change of stance.’ Our bet is that we will see Posen vote for more QE before the end of 2012.
Regardless, the majority of the MPC appear far too concerned with upside risks to inflation, and perhaps with preserving the BoE’s credibility on the issue of maintaining price stability, to step up QE at its next meeting in May or any time soon.
Whilst sterling’s safe-haven status has enabled it to weather the constant threat of QE hanging over it, it has undoubtedly weighed on demand in recent months. Sterling has now been freed up to rally in the aftermath of the minutes, climbing to a 20-month high against the euro and a six month high against the US dollar. Even higher levels will be seen against an increasingly weak single currency, though we maintain a negative outlook for the pound against the US dollar.
Richard Driver
Currency Anlayst
Caxton FX
The last quarterly inflation report assumed a fairly steady downtrend in UK inflation but the MPC is now noting higher medium-term inflation risks, which reduces the attractiveness of further QE. Higher inflation requires tighter monetary policy. For David Miles, the threat of a third consecutive decline in UK growth and another technical recession looms too large and he voted for extra £25bn of QE accordingly. Clearly, next week’s Q1 UK GDP figure will be crucial and the risks of another negative reading are not insignificant. However, April’s PMI surveys from the UK’s manufacturing, construction and services sectors were very encouraging and the recent UK labour statistics also provide room for optimism. The recent UK retail sales figure, which revealed stunning 1.8% growth in March, should ensure a positive GDP number on April 25th.
The BoE does appear to be moving away further monetary easing at present but the UK economy remains distinctly fragile. Many market players will be assuming further QE is now off the table but if inflation eases towards the end of the year and growth remains weak, dovish arguments will once again come to the fore. What’s more, the eurozone debt crisis could force the BoE’s hand if the situation in Spain and Italy deteriorates rapidly.
There is also the issue of Adam Posen’s thinking – whether he has really given up on more asset-purchases. Posen has indicated that he merely saw fit to let the current round of QE run its course. Posen will be able to reassess the need for a top-up in May, by which time the BoE’s inflation projections will have been formally updated and we will know whether the British economy has suffered the dreaded ‘double-dip.’ Only time will tell on this issue, but it’s fair to say the market may have jumped the gun in respect to Posen’s ‘change of stance.’ Our bet is that we will see Posen vote for more QE before the end of 2012.
Regardless, the majority of the MPC appear far too concerned with upside risks to inflation, and perhaps with preserving the BoE’s credibility on the issue of maintaining price stability, to step up QE at its next meeting in May or any time soon.
Whilst sterling’s safe-haven status has enabled it to weather the constant threat of QE hanging over it, it has undoubtedly weighed on demand in recent months. Sterling has now been freed up to rally in the aftermath of the minutes, climbing to a 20-month high against the euro and a six month high against the US dollar. Even higher levels will be seen against an increasingly weak single currency, though we maintain a negative outlook for the pound against the US dollar.
Richard Driver
Currency Anlayst
Caxton FX
Tuesday 10 April 2012
Rising Spanish bond yields highlight market nerves
UK services sector growth suggests no UK double-dip recession
In addition to last week’s strong March growth figures from the UK manufacturing and construction sectors, the services sector joined the party by coming in well above forecasts as well. This probably means that the UK has avoided a entering a technical recession (two consecutive quarters of negative growth), albeit by what is likely to be just the narrowest of margins. Indeed contrary to the OECD’s forecasts, this is what the NIESR have argued in the past week (0.1% growth in Q1).
A second gauge of the UK manufacturing sector was more disappointing last week and has taken the edge off some of the positive sentiment surrounding the UK economy. It certainly is true that this sector has underperformed badly in the past six months and needs to pick up if the UK’s fledging recovery is to pick up any pace. The services sector cannot be the sole source of growth. In terms of important growth figures coming up this month, the 24th April preliminary Q1 GDP figure is the real focus, though next week brings the release of the MPC meeting minutes, as well as the monthly updates from the UK labor market and the retail sector.
US Non-farm payrolls disappoint but no need to panic
Last Friday’s key monthly update from the US labour market revealed that half as many jobs (120k) were added in March, compared to February’s showing. This gives credence to Ben Bernanke’s refusal celebrate the US recovery from the financial crisis. The coming week is noticeably quieter on the data front, with Friday afternoon’s US consumer sentiment figure (forecast to improve) likely to be a highlight.
The dollar struggled a little on the back of Friday’s US jobs figure but it has since recovered. This data will encourage greater caution in the market but it alone won’t trigger large scale revisions of US dollar bets. Global stocks and commodity prices are in decline at present, which is keeping the safe-haven dollar in pretty robust demand, though it is having to wait for significant gains against the pound.
Spanish bond yields on the rise
Nerves surrounding the Spanish and overall eurozone debt situation are clearly on the rise, as shown by the general risk-off tone to present trading conditions. Spain’s Economy Minister today refused to rule out the need for a Spanish financial rescue. PM Rajoy has announced a further €10bn of budget cuts but as Spanish 10-year bond yields climb towards 6.0%, it is evident that market nerves are on the up.
If concerns continue to heat up, the ECB may be persuaded to cut interest rates again to restore sentiment, which is unlikely to be euro-positive. At the very least, an exit from the ECB’s current liquidity measures (monetary easing) is unlikely to come soon; Draghi indicated as much last week. The euro looks poised for a move lower.
Sterling was the third best performing currency against the US dollar in the first quarter of 2012 and it continues to hold up pretty well. GBP/USD’s current levels of $1.5850 remain a good level at which to buy US dollars. Against the euro, sterling is also performing very well. GBP/EUR is trading not too far away from a 19-month high, though it could suffer a short-term downward correction if it fails to push higher from here.
End of week forecast
GBP / EUR 1.2050
GBP / USD 1.5750
EUR / USD 1.3025
GBP / AUD 1.5550
Richard Driver
Currency Analyst
Caxton FX
In addition to last week’s strong March growth figures from the UK manufacturing and construction sectors, the services sector joined the party by coming in well above forecasts as well. This probably means that the UK has avoided a entering a technical recession (two consecutive quarters of negative growth), albeit by what is likely to be just the narrowest of margins. Indeed contrary to the OECD’s forecasts, this is what the NIESR have argued in the past week (0.1% growth in Q1).
A second gauge of the UK manufacturing sector was more disappointing last week and has taken the edge off some of the positive sentiment surrounding the UK economy. It certainly is true that this sector has underperformed badly in the past six months and needs to pick up if the UK’s fledging recovery is to pick up any pace. The services sector cannot be the sole source of growth. In terms of important growth figures coming up this month, the 24th April preliminary Q1 GDP figure is the real focus, though next week brings the release of the MPC meeting minutes, as well as the monthly updates from the UK labor market and the retail sector.
US Non-farm payrolls disappoint but no need to panic
Last Friday’s key monthly update from the US labour market revealed that half as many jobs (120k) were added in March, compared to February’s showing. This gives credence to Ben Bernanke’s refusal celebrate the US recovery from the financial crisis. The coming week is noticeably quieter on the data front, with Friday afternoon’s US consumer sentiment figure (forecast to improve) likely to be a highlight.
The dollar struggled a little on the back of Friday’s US jobs figure but it has since recovered. This data will encourage greater caution in the market but it alone won’t trigger large scale revisions of US dollar bets. Global stocks and commodity prices are in decline at present, which is keeping the safe-haven dollar in pretty robust demand, though it is having to wait for significant gains against the pound.
Spanish bond yields on the rise
Nerves surrounding the Spanish and overall eurozone debt situation are clearly on the rise, as shown by the general risk-off tone to present trading conditions. Spain’s Economy Minister today refused to rule out the need for a Spanish financial rescue. PM Rajoy has announced a further €10bn of budget cuts but as Spanish 10-year bond yields climb towards 6.0%, it is evident that market nerves are on the up.
If concerns continue to heat up, the ECB may be persuaded to cut interest rates again to restore sentiment, which is unlikely to be euro-positive. At the very least, an exit from the ECB’s current liquidity measures (monetary easing) is unlikely to come soon; Draghi indicated as much last week. The euro looks poised for a move lower.
Sterling was the third best performing currency against the US dollar in the first quarter of 2012 and it continues to hold up pretty well. GBP/USD’s current levels of $1.5850 remain a good level at which to buy US dollars. Against the euro, sterling is also performing very well. GBP/EUR is trading not too far away from a 19-month high, though it could suffer a short-term downward correction if it fails to push higher from here.
End of week forecast
GBP / EUR 1.2050
GBP / USD 1.5750
EUR / USD 1.3025
GBP / AUD 1.5550
Richard Driver
Currency Analyst
Caxton FX
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