Now there’s no doubt that the people of the UK are welcoming with open arms the extra bank holiday that will be part of the Queen’s Jubilee celebrations. However, if we take the similar example of last year’s Royal Wedding, then we can expect a significant hit to the UK economy.
It is estimated that the Royal Wedding in 2011 weighed on the UK’s gross domestic product (growth) by 0.4%. An extra bank holiday means businesses are closed for longer - economic activity is reduced. Of course, there is likely to be increased spending on the high street and a boost to industries such as leisure and hospitality. This will certainly compensate for some of the impact on UK growth, but not all of it.
The Jubilee looks set to weigh on growth by 0.3 - 0.6% again this year, which is the last thing that the UK’s struggling economy needs right now. Data last week confirmed that not only did the UK economy contract for a second consecutive quarter but by even more than expected (-0.3% q/q). With the Jubilee set to constrain quarterly growth which was only ever likely to be flat at best, we can expect third consecutive quarter of negative growth.
What does this mean for sterling? Well, it won’t necessarily hurt sterling. After all, last week saw the release of some awful UK retail sales growth data, some much weaker domestic inflation data and a downward revision to the Q1 UK GDP figure. Regardless, sterling performed strongly, thanks to the ongoing focus on all things eurozone and the risk averse, sterling-friendly trading conditions this is creating.
Of course the risk remains that more negative growth will convince the MPC that more quantitative easing is necessary, but as yet the majority of the nine policymakers seem happy to let the last round of QE to feed through, particularly with medium-term UK inflation risks well-balanced and present inflation levels still elevated.
One common ‘silver-lining’ lining argument is that while the Jubilee may hurt Q2, the London Olympics are only just around the corner in Q3. Estimates have surfaced that the spending linked to the Olympics will boost UK GDP by 0.5%. We approach these predictions with a great deal of caution though, as do the Bank of England, since the impact and success of mega-events such as the Olympics are highly unpredictable. Sydney 2000 boosted Australia’s economy considerably, while Athens 2004 left the Greek economy crippled.
We maintain a positive view for sterling this year, except against the US dollar, regardless of stagnant/negative growth. Clearly the caveat here is that the picture may change if growth is so poor that the BoE pull the trigger on more QE – a major downside risk for sterling. Looking at the limited impact of the last round of QE on sterling though, there is a good chance sterling will hold up firmly again.
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 29 May 2012
Monday 28 May 2012
Greek opinion polls provide some hope but confidence still fragile
Greek opinion polls give the market some hope
The euro was given some relief in early Monday trading by the positive news that in Greece, the conservative and pro-austerity party - New Democracy – has edged ahead of the anti-bailout party Syriza in the opinion polls. If New Democracy can hang on to their lead and re-establish a pro-bailout, pro-austerity and pro-euro coalition, then fears of a Greek exit should subside. Judging by the euro’s brief and fairly minor bounce since the weekend though, the market remains understandably cautious.
Concerns over Spain are also growing, as the country’s ten year bond yields climb towards 6.50%, bringing into view the dangerous 7.0% benchmark which forced other peripheral nations, like Portugal and Greece, into requesting bailouts. Spain’s fourth-largest lender Bankia requires a bailout and the Spanish region of Catalonia is also in need of help to refinance its debt. Consequently, the risks of a Spanish sovereign bailout are increasing, which would create a huge amount of stress on the EU’s aid resources, as well as raising major question marks over Italy.
In addition to these mounting Spanish concerns, growth data from the eurozone was all pointing the wrong way last week. Figures from the German, French and eurozone-wide services and manufacturing sectors almost all disappointed, suggesting that the eurozone’s avoidance of economic contraction in Q1 will prove temporary.
With respect to the issue of Eurobonds, Germany doesn’t look like it will budge. What’s more, Austria, the Netherlands and Sweden have joined Germany in expressing their opposition to the idea of common eurozone bonds, so market hopes for a silver bullet have once again been quashed.
US GDP figure should confirm slowdown
This week brings two important growth figures from the US, in the form of the revised GDP estimate for the first quarter of 2012 (due on Thursday). The figure is expected to be revised down from 2.2% to 1.9%, well off Q4 2011’s impressive quarterly reading of 3.0%. Friday brings the monthly update from the US labour market and improvements in this area are expected to be moderate at best.
The US dollar’s safe haven status has very much come to the fore in the past month. Clearly ongoing softness in US figures keeps QE3 on the table as far as the Fed is concerned but we see safe-haven demand helping it appreciate further across the board. In particular, we foresee heavy losses for EUR/USD in the second half of this year, which will inevitably drive GBP/USD lower too.
Sterling is trading up above €1.25 this afternoon, with the positivity surrounding the Greek opinion polls already having dissipated. Sterling weathered some awful data last week, including a downward revision to the UK’s Q1 GDP figure to -0.3% and a steep drop in the domestic inflation rate. However, sterling’s safe-haven status still looks likely to push it even higher against the euro.
In contrast, sterling is always going to be under pressure against the US dollar. It should benefit from a minor short-covering bounce soon, though a return anywhere close to $1.60 looks a stretch now. Risk appetite away from the US dollar is likely to be hard-pushed to return in force ahead of the June 17th Greek elections.
End of week forecast
GBP / EUR 1.26
GBP / USD 1.5750
EUR / USD 1.25
GBP / AUD 1.6050
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 euro was given some relief in early Monday trading by the positive news that in Greece, the conservative and pro-austerity party - New Democracy – has edged ahead of the anti-bailout party Syriza in the opinion polls. If New Democracy can hang on to their lead and re-establish a pro-bailout, pro-austerity and pro-euro coalition, then fears of a Greek exit should subside. Judging by the euro’s brief and fairly minor bounce since the weekend though, the market remains understandably cautious.
Concerns over Spain are also growing, as the country’s ten year bond yields climb towards 6.50%, bringing into view the dangerous 7.0% benchmark which forced other peripheral nations, like Portugal and Greece, into requesting bailouts. Spain’s fourth-largest lender Bankia requires a bailout and the Spanish region of Catalonia is also in need of help to refinance its debt. Consequently, the risks of a Spanish sovereign bailout are increasing, which would create a huge amount of stress on the EU’s aid resources, as well as raising major question marks over Italy.
In addition to these mounting Spanish concerns, growth data from the eurozone was all pointing the wrong way last week. Figures from the German, French and eurozone-wide services and manufacturing sectors almost all disappointed, suggesting that the eurozone’s avoidance of economic contraction in Q1 will prove temporary.
With respect to the issue of Eurobonds, Germany doesn’t look like it will budge. What’s more, Austria, the Netherlands and Sweden have joined Germany in expressing their opposition to the idea of common eurozone bonds, so market hopes for a silver bullet have once again been quashed.
US GDP figure should confirm slowdown
This week brings two important growth figures from the US, in the form of the revised GDP estimate for the first quarter of 2012 (due on Thursday). The figure is expected to be revised down from 2.2% to 1.9%, well off Q4 2011’s impressive quarterly reading of 3.0%. Friday brings the monthly update from the US labour market and improvements in this area are expected to be moderate at best.
The US dollar’s safe haven status has very much come to the fore in the past month. Clearly ongoing softness in US figures keeps QE3 on the table as far as the Fed is concerned but we see safe-haven demand helping it appreciate further across the board. In particular, we foresee heavy losses for EUR/USD in the second half of this year, which will inevitably drive GBP/USD lower too.
Sterling is trading up above €1.25 this afternoon, with the positivity surrounding the Greek opinion polls already having dissipated. Sterling weathered some awful data last week, including a downward revision to the UK’s Q1 GDP figure to -0.3% and a steep drop in the domestic inflation rate. However, sterling’s safe-haven status still looks likely to push it even higher against the euro.
In contrast, sterling is always going to be under pressure against the US dollar. It should benefit from a minor short-covering bounce soon, though a return anywhere close to $1.60 looks a stretch now. Risk appetite away from the US dollar is likely to be hard-pushed to return in force ahead of the June 17th Greek elections.
End of week forecast
GBP / EUR 1.26
GBP / USD 1.5750
EUR / USD 1.25
GBP / AUD 1.6050
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Thursday 24 May 2012
UK recession confirmed...and it’s worse than first thought
Data on Wednesday has confirmed that not only did the UK enter a double-dip recession in Q1 of 2012, but it contracted by 0.3%, rather than the -0.2% figure that was initially estimated April. At the time of the initial estimate in April, sterling was spared quite a bit of pain because the market thought it knew better than the Office of National Statistics (which releases the GDP figures). In particular, many questioned the ONS’ assessment of growth in the construction sector. Ironically, a downward revision to construction growth was largely responsible for today's headline.
The MPC was also a little guilty of overestimating UK economic conditions in the first quarter, choosing to focus on some more positive but ultimately misleading PMI surveys from the UK construction, services and manufacturing sectors. Indeed Adam Posen, for his part, has admitted as much.
What seemed like a bright start to the year had definitely fizzled out then and the UK economy is set to struggle for the rest of 2012, possibly contracting by 0.5%, as ongoing UK austerity kicks in and the eurozone crisis weighs on external demand, and internal lending and confidence.
Still though, sterling has weathered Wednesday’s downward GDP revision very well. There is very much a sense that the market is fully aware that UK growth will be stagnant this year, but at least it is getting its public finances in order, and as shown by the UK’s ultra-low borrowing costs, it is clearly removed from the threat of eurozone debt contagion. Sterling’s appeal isn’t based on the imminence of monetary tightening or a positive growth outlook. The pound is basically the poor man’s US dollar, a second tier safe-haven.
In line with a pessimistic outlook for Greece and regardless of the likelihood of further QE from the BoE and the UK’s vulnerability to eurozone developments, we have a positive outlook for sterling against the euro and other risky, commodity currencies like the AUD and ZAR. Clearly, our view is less positive against the US dollar – we see GBP/USD heading down to $1.50 in the second half of this year.
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 MPC was also a little guilty of overestimating UK economic conditions in the first quarter, choosing to focus on some more positive but ultimately misleading PMI surveys from the UK construction, services and manufacturing sectors. Indeed Adam Posen, for his part, has admitted as much.
What seemed like a bright start to the year had definitely fizzled out then and the UK economy is set to struggle for the rest of 2012, possibly contracting by 0.5%, as ongoing UK austerity kicks in and the eurozone crisis weighs on external demand, and internal lending and confidence.
Still though, sterling has weathered Wednesday’s downward GDP revision very well. There is very much a sense that the market is fully aware that UK growth will be stagnant this year, but at least it is getting its public finances in order, and as shown by the UK’s ultra-low borrowing costs, it is clearly removed from the threat of eurozone debt contagion. Sterling’s appeal isn’t based on the imminence of monetary tightening or a positive growth outlook. The pound is basically the poor man’s US dollar, a second tier safe-haven.
In line with a pessimistic outlook for Greece and regardless of the likelihood of further QE from the BoE and the UK’s vulnerability to eurozone developments, we have a positive outlook for sterling against the euro and other risky, commodity currencies like the AUD and ZAR. Clearly, our view is less positive against the US dollar – we see GBP/USD heading down to $1.50 in the second half of this year.
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 23 May 2012
MPC minutes reveal no extra doves but QE risks remain prominent
Wednesday’s MPC minutes revealed that David Miles remained the one and only policymaker in favour of an additional round of quantitative easing (£25bn) at the rate-setting committee’s May meeting. We have to admit that we expected one or two other policymakers to give Miles some company in the dovish camp, but we maintain that he won’t be the lone dove for long.
This much has been indicated by Adam Posen, who has been expressing second thoughts with regard to his decision to abandon his calls for QE, pointing to a potential overestimation of UK growth over Q1. We’d be surprised if Posen fall back to his dovish tendencies in June. Though it may take more than Posen to worry holders of sterling, given that a 7-2 split on the QE vote still keeps the dovish very much in the minority.
One major point that could dissuade several policymakers to vote for QE is the fact that they believe UK inflation is equally likely to be above target as below it in the medium term without more monetary stimulus. In addition, current CPI levels, regardless of the recent fall from 3.5% to 3.0%, are high.
Nonetheless, it was stressed that for several members of the committee, the decision was finely balanced and the option remains well and truly on the table. The latest figure from the UK retail sector, combined with the softer start we saw to Q2 in the form of some weak UK PMI surveys, will increase speculation that the UK’s struggling economy is in need of some extra monetary help.
The key factor that could well have the final say on the BoE QE debate is of course the eurozone debt crisis. The situation in Greece has taken a severe turn for the worse since the failure of the ruling coalition to secure sufficient support at its recent general election. A new round of elections is due on June 17th, which could well produce an anti-bailout collation and lead to a Greek euro-exit. Meanwhile, fault lines within the EU leadership have been highlighted this week in Germany’s rejection of French and Italian plans to introduce a common eurozone bond (a Eurobond).
As shown by the euro’s recent slide, confidence in the euro project is waning. We expect the euro-region to return to negative growth this year and the financial shockwaves from a probable Greek exit are expected to be worse than those of Lehman’s. Consequently, we bet we haven’t seen the last of UK quantitative easing in 2012.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
This much has been indicated by Adam Posen, who has been expressing second thoughts with regard to his decision to abandon his calls for QE, pointing to a potential overestimation of UK growth over Q1. We’d be surprised if Posen fall back to his dovish tendencies in June. Though it may take more than Posen to worry holders of sterling, given that a 7-2 split on the QE vote still keeps the dovish very much in the minority.
One major point that could dissuade several policymakers to vote for QE is the fact that they believe UK inflation is equally likely to be above target as below it in the medium term without more monetary stimulus. In addition, current CPI levels, regardless of the recent fall from 3.5% to 3.0%, are high.
Nonetheless, it was stressed that for several members of the committee, the decision was finely balanced and the option remains well and truly on the table. The latest figure from the UK retail sector, combined with the softer start we saw to Q2 in the form of some weak UK PMI surveys, will increase speculation that the UK’s struggling economy is in need of some extra monetary help.
The key factor that could well have the final say on the BoE QE debate is of course the eurozone debt crisis. The situation in Greece has taken a severe turn for the worse since the failure of the ruling coalition to secure sufficient support at its recent general election. A new round of elections is due on June 17th, which could well produce an anti-bailout collation and lead to a Greek euro-exit. Meanwhile, fault lines within the EU leadership have been highlighted this week in Germany’s rejection of French and Italian plans to introduce a common eurozone bond (a Eurobond).
As shown by the euro’s recent slide, confidence in the euro project is waning. We expect the euro-region to return to negative growth this year and the financial shockwaves from a probable Greek exit are expected to be worse than those of Lehman’s. Consequently, we bet we haven’t seen the last of UK quantitative easing in 2012.
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 22 May 2012
Euro rebounds a little, but not for long
Sterling’s rally finally comes to a halt
Whilst sterling remains strong against the commodity currencies, it has suffered somewhat against the euro and the US dollar in recent sessions. The Bank of England’s Quarterly Inflation Report proved the catalyst for a significant bout of profit-taking on the pound’s rally. The Report saw the BoE downgrade its longer-term inflation and growth forecasts, sounding particularly dovish whilst doing so. Concerns over whether the BoE will introduce further quantitative easing have increased as a result, which has weighed on the pound significantly.
The week ahead brings with it plenty of risks for sterling. Wednesday’s minutes will once again bring BoE monetary policy back into focus – all eyes will be on how the MPC voted on QE in its May meeting. David Miles is likely to have stuck to his pro-QE stance and one or two others may well have been convinced by his arguments, which would be sterling-negative. Comments from the once reliably dovish Adam Posen have also added to QE bets. Posen publically questioned the wisdom of his decision not to vote for QE at the MPC’s May meeting, suggesting he can be counted on to do so again in coming months. Inflation data this morning has seen the headline rate come down pretty sharply from 3.5% to 3.0%, once again bolstering arguments in favour of monetary easing.
Also on Wednesday we have the release of April’s growth data from the UK’s retail sector. Having seen the wettest April since records began, the figure is expected to show a fairly sizeable contraction, particularly after the excellent growth seen in March. Thursday brings the revised UK GDP figure for the first quarter of this year. No amendment from the initial estimate of -0.2%, so the figure is unlikely to be a source of great support for the pound.
On the face of it then, it looks to be a tough week ahead for the pound. In addition to these domestic announcements, risk appetite away from safer currencies such as sterling looks to be staging a minor recovery. With the potentially disastrous effects of a Greek euro-exit now sunk in, if not fully priced in, we may well have seen the worst of investor panic. That is of course until the Greek elections come into view in the build up to the June 17th Greek elections. Sterling’s safe-haven demand looks set to come back to the fore ahead of this huge risk event.
G8 pledge support for Greece to remain within euro
The leaders of the world’s eight largest industrialised nations backed Greece to remain within the single currency over the weekend. With Germany sticking to its demands for austerity though (and who can really blame them?), it’s tough to see how the situation can lead to anything but a Greek default and euro-exit.
The profit-taking on sterling’s rally has taken the GBP/EUR rate down to its current level of €1.2350. It is difficult to see sterling losing too much more ground to the euro given the uncertainty that is lurking in June but with sterling facing several risky announcements this week, we may see today’s sideways trading theme dominate direction this week.
Against the dollar, sterling continues to feel the heat and is now trading down at $1.58. We expect to see the USD maintain its current demand, though its recent rate of appreciation is clearly unsustainable. EUR/USD has staged a minor recovery, having touched a 4-month low around $1.2650. We are going to need to see further climb from the current level of $1.2770 towards $1.30 if we are to revise calls for much lower levels in coming weeks.
End of week forecast
GBP / EUR 1.24
GBP / USD 1.57
EUR / USD 1.27
GBP / AUD 1.60
Richard Driver
Caxton FX
Whilst sterling remains strong against the commodity currencies, it has suffered somewhat against the euro and the US dollar in recent sessions. The Bank of England’s Quarterly Inflation Report proved the catalyst for a significant bout of profit-taking on the pound’s rally. The Report saw the BoE downgrade its longer-term inflation and growth forecasts, sounding particularly dovish whilst doing so. Concerns over whether the BoE will introduce further quantitative easing have increased as a result, which has weighed on the pound significantly.
The week ahead brings with it plenty of risks for sterling. Wednesday’s minutes will once again bring BoE monetary policy back into focus – all eyes will be on how the MPC voted on QE in its May meeting. David Miles is likely to have stuck to his pro-QE stance and one or two others may well have been convinced by his arguments, which would be sterling-negative. Comments from the once reliably dovish Adam Posen have also added to QE bets. Posen publically questioned the wisdom of his decision not to vote for QE at the MPC’s May meeting, suggesting he can be counted on to do so again in coming months. Inflation data this morning has seen the headline rate come down pretty sharply from 3.5% to 3.0%, once again bolstering arguments in favour of monetary easing.
Also on Wednesday we have the release of April’s growth data from the UK’s retail sector. Having seen the wettest April since records began, the figure is expected to show a fairly sizeable contraction, particularly after the excellent growth seen in March. Thursday brings the revised UK GDP figure for the first quarter of this year. No amendment from the initial estimate of -0.2%, so the figure is unlikely to be a source of great support for the pound.
On the face of it then, it looks to be a tough week ahead for the pound. In addition to these domestic announcements, risk appetite away from safer currencies such as sterling looks to be staging a minor recovery. With the potentially disastrous effects of a Greek euro-exit now sunk in, if not fully priced in, we may well have seen the worst of investor panic. That is of course until the Greek elections come into view in the build up to the June 17th Greek elections. Sterling’s safe-haven demand looks set to come back to the fore ahead of this huge risk event.
G8 pledge support for Greece to remain within euro
The leaders of the world’s eight largest industrialised nations backed Greece to remain within the single currency over the weekend. With Germany sticking to its demands for austerity though (and who can really blame them?), it’s tough to see how the situation can lead to anything but a Greek default and euro-exit.
The profit-taking on sterling’s rally has taken the GBP/EUR rate down to its current level of €1.2350. It is difficult to see sterling losing too much more ground to the euro given the uncertainty that is lurking in June but with sterling facing several risky announcements this week, we may see today’s sideways trading theme dominate direction this week.
Against the dollar, sterling continues to feel the heat and is now trading down at $1.58. We expect to see the USD maintain its current demand, though its recent rate of appreciation is clearly unsustainable. EUR/USD has staged a minor recovery, having touched a 4-month low around $1.2650. We are going to need to see further climb from the current level of $1.2770 towards $1.30 if we are to revise calls for much lower levels in coming weeks.
End of week forecast
GBP / EUR 1.24
GBP / USD 1.57
EUR / USD 1.27
GBP / AUD 1.60
Richard Driver
Caxton FX
Friday 18 May 2012
Possible Greek euro-exit weighing on the euro
Sterling has enjoyed an easy time of it of late but the dovish Quarterly Inflation Report continued to weigh yesterday. This was despite comments from the MPC’s Fisher indicating that a slip into a deep recession would be necessary to justify further quantitative easing from the BoE, which at present does not seem likely.
It’s a fairly empty data calendar today, but we should see some comments emerging from the first day of this weekend’s G8 meeting.
For more information throughout the day follow me on twitter @caxtonfx
STERLING/EURO: This pair struggled again as investors continued to take profit on GBP’s impressive rally.
• Sterling has come a long way fast against the euro and the dovish inflation report from the BoE has provided a logical opportunity for some profit-taking on this pair’s hefty gains. Today’s G8 meeting could be an important one in terms of settling down the growing panic surrounding Greece, though these summits tend to disappoint and it is more and more difficult to envisage a positive outcome for the country. There was more action from the rating agencies yesterday, with Moody’s downgrading 16 Spanish bank and Fitch downgrading Greece.
• Sterling is trading at €1.2450, downside potential is limited from here and we continue to target higher levels.
STERLING/US DOLLAR: Sterling has had an awful week against the US dollar, as the premium safe-haven flexes its muscles.
• Sterling has declined from $1.61 to $1.58, which amounts to almost a 2.0% fall in the space of three sessions. Sterling has certainly been treated as a safe-haven this year, but the performance of the US dollar amid the growing panic surrounding the eurozone has highlighted the fact that it, along with the Japanese yen, is still a top-tier safe haven currency.
• We are likely to see further risk-off conditions as we head into the weekend, which should see the dollar remain firm. For now this pair trades below $1.58.
EURO/US DOLLAR: This pair has this morning revisited January’s lows below $1.2650 and the euro’s decline is unlikely to stop there.
• Spain got its debt auction away yesterday without too much trouble but the euro understandably failed to find any support. Over in the US, we saw some poor manufacturing data, highlighting the patchy recovery we are seeing at present. This really just added to the risk-off trading conditions and sent this pair lower.
• The euro is trading well below $1.27 this morning and the risks here remain to the downside unless the G8 can pull a rabbit out of the hat. All the while, concerns for countries like Portugal increase.
STERLING/AUSTRALIAN DOLLAR: Sterling headed back up against the AUD as risk appetite took a sharp downturn in Asia last night.
• Sterling found it tough going yesterday but risky assets sold off fairly aggressively last night, not helped by a fresh dose of sovereign and bank credit rating downgrades. Asian stock indices declined by as much as 3.0% last night, which explains why sterling helped itself to a cent and half spike against the AUD.
• Further sterling gains look likely against the AUD as investors run for safety as the weekend approaches.
STERLING/NEW ZEALAND DOLLAR: The kiwi dollar’s respite was short-lived as this pair jumps by 2 ½ cents on Spanish fears.
• With Spanish banks suffering a mass downgrade, fears of a banking collapse in the eurozone’s fourth largest economy are rising. Sharp losses in global equities tells the story here and there is little else driving the kiwi dollar in the current environment.
• As a result, we can only see further losses for the kiwi dollar, which should bring 2.10 back into view for this pair. For now, this pair trades at 2.0850.
STERLING/CANADIAN DOLLAR: It was a case of more sideways trading for this pair as the CAD shows a little more stomach for the fight than other commodity currencies.
• The loonie is not suffering the sharp declines that other commodity currencies such as the AUD and NZD are enduring at present. Sterling is clearly at decent levels against the CAD but gains have been capped somewhat.
• Canada’s monthly inflation data is released this afternoon, which will be of interest in terms of BoC monetary policy. We are expecting to see prices ease somewhat, which may give sterling some support here today. Ultimately, global risk appetite will prove more important, which should keep sterling close to the 1.61 level.
Richard Driver, Analyst
It’s a fairly empty data calendar today, but we should see some comments emerging from the first day of this weekend’s G8 meeting.
For more information throughout the day follow me on twitter @caxtonfx
STERLING/EURO: This pair struggled again as investors continued to take profit on GBP’s impressive rally.
• Sterling has come a long way fast against the euro and the dovish inflation report from the BoE has provided a logical opportunity for some profit-taking on this pair’s hefty gains. Today’s G8 meeting could be an important one in terms of settling down the growing panic surrounding Greece, though these summits tend to disappoint and it is more and more difficult to envisage a positive outcome for the country. There was more action from the rating agencies yesterday, with Moody’s downgrading 16 Spanish bank and Fitch downgrading Greece.
• Sterling is trading at €1.2450, downside potential is limited from here and we continue to target higher levels.
STERLING/US DOLLAR: Sterling has had an awful week against the US dollar, as the premium safe-haven flexes its muscles.
• Sterling has declined from $1.61 to $1.58, which amounts to almost a 2.0% fall in the space of three sessions. Sterling has certainly been treated as a safe-haven this year, but the performance of the US dollar amid the growing panic surrounding the eurozone has highlighted the fact that it, along with the Japanese yen, is still a top-tier safe haven currency.
• We are likely to see further risk-off conditions as we head into the weekend, which should see the dollar remain firm. For now this pair trades below $1.58.
EURO/US DOLLAR: This pair has this morning revisited January’s lows below $1.2650 and the euro’s decline is unlikely to stop there.
• Spain got its debt auction away yesterday without too much trouble but the euro understandably failed to find any support. Over in the US, we saw some poor manufacturing data, highlighting the patchy recovery we are seeing at present. This really just added to the risk-off trading conditions and sent this pair lower.
• The euro is trading well below $1.27 this morning and the risks here remain to the downside unless the G8 can pull a rabbit out of the hat. All the while, concerns for countries like Portugal increase.
STERLING/AUSTRALIAN DOLLAR: Sterling headed back up against the AUD as risk appetite took a sharp downturn in Asia last night.
• Sterling found it tough going yesterday but risky assets sold off fairly aggressively last night, not helped by a fresh dose of sovereign and bank credit rating downgrades. Asian stock indices declined by as much as 3.0% last night, which explains why sterling helped itself to a cent and half spike against the AUD.
• Further sterling gains look likely against the AUD as investors run for safety as the weekend approaches.
STERLING/NEW ZEALAND DOLLAR: The kiwi dollar’s respite was short-lived as this pair jumps by 2 ½ cents on Spanish fears.
• With Spanish banks suffering a mass downgrade, fears of a banking collapse in the eurozone’s fourth largest economy are rising. Sharp losses in global equities tells the story here and there is little else driving the kiwi dollar in the current environment.
• As a result, we can only see further losses for the kiwi dollar, which should bring 2.10 back into view for this pair. For now, this pair trades at 2.0850.
STERLING/CANADIAN DOLLAR: It was a case of more sideways trading for this pair as the CAD shows a little more stomach for the fight than other commodity currencies.
• The loonie is not suffering the sharp declines that other commodity currencies such as the AUD and NZD are enduring at present. Sterling is clearly at decent levels against the CAD but gains have been capped somewhat.
• Canada’s monthly inflation data is released this afternoon, which will be of interest in terms of BoC monetary policy. We are expecting to see prices ease somewhat, which may give sterling some support here today. Ultimately, global risk appetite will prove more important, which should keep sterling close to the 1.61 level.
Richard Driver, Analyst
Tuesday 15 May 2012
Greek coalition talks collapse and prospect of new elections hurts euro
Sterling remains flavor of the month
Sterling has climbed by a further three cents against the euro in the past fortnight. Sterling’s progress against commodity currencies such as the AUD, NZD, CAD and ZAR has been ever more impressive in the past few months. Sterling has climbed by over 10% against the ZAR and NZD since mid-Feb, while it has advanced against the ZAR by the same margin since mid-March.
Sterling’s safe-haven status is behind its demand and this is not something we see disappearing any time soon. Also helping the pound was last week’s MPC vote against further quantitative easing. Whilst there will be some nerves surrounding the voting pattern (to be revealed by the MPC minutes next week), stubbornly high inflation seems to be of greater concern to the policymakers (thus making more QE harder to justify). Tomorrow’s Quarterly Inflation Report from the Bank of England will be highly relevant in this regard. A firmer inflation outlook is likely to be provided, which again should be broadly supportive of the pound.
Euro suffers from lack of Greek coalition agreement
Global investor confidence and risk appetite has taken a turn for the worse in the past fortnight, driven by concerns over Greece. Since the failure of the ruling Greek coalition to maintain sufficient votes at its recent election, major doubts have arisen as to whether Greece will remain within the euro. Coalition talks have collapsed and another election will be held in mid-June, which means the current uncertainty will be extended. As a result, Spanish and Italian bond yields are on the rise, with the former’s 10-year debt yields looking particularly alarming at fresh 2012 highs over 6.25%.
Should an anti-austerity coalition government surface from the current mess, then Greek bailout funds would be withheld, leading to default and a probable Greek breakaway. The knock-on effects in the eurozone and the global financial system as a whole are expected to be more drastic than those of Lehman’s collapse. It is no surprise then, that the euro has suffered a significant decline, with perceived safer-currencies such as sterling and the US dollar filling the void.
GDP data out of the eurozone was very mixed indeed this morning. Italy broadly stuck to the script by contracting by 0.8% in Q1 of this year, while French growth remained stagnant. However, the German economy grew by 0.5% in Q1, which helped the eurozone economy as a whole avoid a technical recession by posting a 0.0% GDP figure. This development has given the euro a mild boost today but with so much austerity still to be delivered in the eurozone and today’s forward-looking economic sentiment surveys showing a fairly sharp decline, eurozone growth is highly likely to return to negative territory this year.
Sterling is trading at €1.25 today, which represents near enough a three and a half year high. We are not calling a top to this pair’s ascent just yet either, with nerves surrounding Greece likely to deteriorate over the coming weeks. In risk averse conditions, the pound has understandably traded a little softer against the US dollar, coming off its highs of $1.63 to trade two and a half cents lower today. This pair could well test the $1.60 level fairly soon, though we are not anticipating any major collapse.
End of week forecast
GBP / EUR 1.26
GBP / USD 1.5950
EUR / USD 1.27
GBP / AUD 1.61
Sterling has climbed by a further three cents against the euro in the past fortnight. Sterling’s progress against commodity currencies such as the AUD, NZD, CAD and ZAR has been ever more impressive in the past few months. Sterling has climbed by over 10% against the ZAR and NZD since mid-Feb, while it has advanced against the ZAR by the same margin since mid-March.
Sterling’s safe-haven status is behind its demand and this is not something we see disappearing any time soon. Also helping the pound was last week’s MPC vote against further quantitative easing. Whilst there will be some nerves surrounding the voting pattern (to be revealed by the MPC minutes next week), stubbornly high inflation seems to be of greater concern to the policymakers (thus making more QE harder to justify). Tomorrow’s Quarterly Inflation Report from the Bank of England will be highly relevant in this regard. A firmer inflation outlook is likely to be provided, which again should be broadly supportive of the pound.
Euro suffers from lack of Greek coalition agreement
Global investor confidence and risk appetite has taken a turn for the worse in the past fortnight, driven by concerns over Greece. Since the failure of the ruling Greek coalition to maintain sufficient votes at its recent election, major doubts have arisen as to whether Greece will remain within the euro. Coalition talks have collapsed and another election will be held in mid-June, which means the current uncertainty will be extended. As a result, Spanish and Italian bond yields are on the rise, with the former’s 10-year debt yields looking particularly alarming at fresh 2012 highs over 6.25%.
Should an anti-austerity coalition government surface from the current mess, then Greek bailout funds would be withheld, leading to default and a probable Greek breakaway. The knock-on effects in the eurozone and the global financial system as a whole are expected to be more drastic than those of Lehman’s collapse. It is no surprise then, that the euro has suffered a significant decline, with perceived safer-currencies such as sterling and the US dollar filling the void.
GDP data out of the eurozone was very mixed indeed this morning. Italy broadly stuck to the script by contracting by 0.8% in Q1 of this year, while French growth remained stagnant. However, the German economy grew by 0.5% in Q1, which helped the eurozone economy as a whole avoid a technical recession by posting a 0.0% GDP figure. This development has given the euro a mild boost today but with so much austerity still to be delivered in the eurozone and today’s forward-looking economic sentiment surveys showing a fairly sharp decline, eurozone growth is highly likely to return to negative territory this year.
Sterling is trading at €1.25 today, which represents near enough a three and a half year high. We are not calling a top to this pair’s ascent just yet either, with nerves surrounding Greece likely to deteriorate over the coming weeks. In risk averse conditions, the pound has understandably traded a little softer against the US dollar, coming off its highs of $1.63 to trade two and a half cents lower today. This pair could well test the $1.60 level fairly soon, though we are not anticipating any major collapse.
End of week forecast
GBP / EUR 1.26
GBP / USD 1.5950
EUR / USD 1.27
GBP / AUD 1.61
Wednesday 2 May 2012
Monthly Report: GBP/EUR and GBP/USD
Sterling has performed excellently in the past month, hitting fresh multi-month highs almost across the board. Some notably less dovish Monetary Policy Committee (MPC) minutes provided the trigger for a sterling rally in April, with the market subsequently betting against the likelihood of further Bank of England (BoE) quantitative easing (QE) - a key factor which has weighed on the pound over the past seven months.
The Office of National Statistics (ONS) last week announced the disappointing news that the UK economy contracted by 0.2% in the first three months of 2012. Taken with Q4 2011’s 0.1% contraction, this latest GDP figure signalled the UK having entered a technical recession. Nonetheless, sterling continues to enjoy strong demand as circumstances worsen on the continent.
The US dollar is still struggling to capitalise on its economy’s comparative strength. US growth data has fallen off its impressive uptrend somewhat, as shown by April’s softer unemployment figures and the recent undershoot in the first quarter US GDP figure.
This has played into the hands of the more cautious members of the US Federal Reserve, including Chairman Ben Bernanke, who refuse to rule out the possibility of another round of US quantitative easing. The market is becoming increasingly obsessed with the Fed’s monetary policy outlook and ongoing QE3 speculation continues to hurt the dollar’s performance.
The eurozone’s debt and growth situation is looking no better and worryingly, perhaps as a result of this lack of progress, the eurozone has become embroiled in fresh political uncertainty. French President Nicholas Sarkozy, could well suffer electoral defeat on the 6 May, whilst Greece will be holding parliamentary elections on the same date. Both elections could have significant ramifications on the direction of eurozone debt crisis in the short and long-term.
GBP/EUR
April saw sterling finally break away from the €1.21 level that had proven so sticky in the year to date. News out of the eurozone has been distinctly negative of late but unusually, the latest direction in this pair wasn’t predominantly euro-driven, but the result of much-improved sentiment towards the pound.
Economically, the situation in the UK remains extremely shaky. While April’s growth figures from the manufacturing, construction and services sectors were all encouraging and retail sales growth was staggeringly strong, the UK GDP figure for Q1 revealed a disappointing 0.2% contraction.
The market appears to be more than a little sceptical with regard to the ONS’s findings and will be looking for an upward revision to the GDP figure on 24 May. Regardless, the headlines surrounding a ‘double-dip recession’ are likely to weigh on consumer and business confidence alike.
UK suffers the double-dip
Whether or not the UK is indeed in a technical recession, UK growth will remain extremely weak in 2012. Disappointingly, Moody’s has recently placed doubt over the likelihood of any economic boost to the UK as a result of the London Olympics in the summer. The eurozone crisis continues to pose the greatest risk to the UK economy. As shown by the latest UK manufacturing figures, export orders are slowing and the eurozone’s economic contraction will undoubtedly drag on domestic activity.
The good news for sterling, however, is that its appeal is not based on economic growth potential. Sterling still represents a convenient alternative to investors looking to exit the euro but stay within Europe. Sterling is also a currency over which there is no threat of intervention looming (unlike the Japanese yen and the Swiss franc).
Despite the recent double-dip headlines, the UK government has reiterated its commitment to the austerity path, in order to maintain the faith of both the credit rating agencies and investors, thus keeping borrowing costs low. As a result, sterling’s ‘second tier’ safe-haven status has really come to the fore in the past few weeks and will provide plenty of support as the debt crisis rolls on.
MPC steps away from QE
Most importantly, sterling is now a currency over which there is perceived to be a reduced threat of quantitative easing, which contrasts particularly with the US dollar. The minutes from the MPC’s April meeting revealed that Adam Posen did not vote for additional QE, which took the market very much by surprise and left only David Miles as the solitary voter for additional monetary easing.
After a slight increase in UK inflation up to 3.5% in March, the MPC increased its medium-term inflation projections. The MPC’s apparent preoccupation with UK price pressures, over and above the state of UK growth, has seen bets on the likelihood of further QE from the BoE scaled back. With the MPC likely to remain in wait and see mode’ at its May meeting on 10 May, the pound has gone from strength to strength. Beyond this month though, there remain significant risks that the more pro-QE arguments will resurface to haunt the pound.
Downside risks to the euro
With regard to the single currency, events in the eurozone over recent weeks have certainly weighed on confidence, though not as much as one might expect. Growth data from Germany, France and the eurozone as a whole disappointed in April and another quarterly contraction is likely to be announced on 15 May. This will put the eurozone in the same boat as the UK - in technical recession. However, there’s no doubt the eurozone faces greater downside risks to growth than the UK moving forward and its recession is almost certain to continue through Q2.
Last month’s Spring IMF meeting failed to convince the markets that EU leaders have a proper handle on the EU’s ongoing crisis. The region’s ‘financial firewall’ has been bolstered by a further $430bn, which is a significant development. However, rating agency S&P has recently seen fit to downgrade eleven Spanish banks, which has seen Spanish and Italian 10-year bond yields make their way back up towards the dangerous 6.00% mark -a good bellwether of rising market tensions.
These rising tensions can largely be put down to fresh political concerns. 6 May brings the second and final round of the French presidential election. Nicholas Sarkozy is facing a likely defeat by Socialist candidate Francois Hollande, which places huge uncertainty over the EU’s Franco-German leadership, the EU’s fiscal compact and its ‘austerity first’ position.
Meanwhile in Greece, parliamentary elections threaten to prevent the country’s two leading pro-bailout parties from securing a majority, which again casts uncertainty over Greece’s bailout situation. In addition, the Dutch government’s collapse as a result of disagreements over austerity measures is telling of a growing political discontent across the region. There is a significant risk that the austerity backlash could spread to the UK local elections this week but the government is nonetheless unlikely to be derailed on its commitment to deficit-reduction.
GBP/EUR has climbed by over 2.50% in the past month, hitting fresh multi-month highs up to this week’s peak above €1.23 (the highest since July 2010). We are looking for further gains in the rate as conditions in the eurozone continue to deteriorate, with the €1.25 (80p) level representing the first key target.
GBP/USD
The US dollar remained soft in April, hemmed in by weaker US economic data and ongoing dovish rhetoric from US Federal Reserve Chairman Ben Bernanke. The monthly US jobs figure for March revealed that half as many jobs were added to the payrolls compared to February and US GDP data for the first quarter of 2012 came in at a disappointing 2.2% (annualised), against expectations of a 2.6% reading. Clearly the US economy is recovering at a far stronger pace than what we are seeing in the UK but it is the implications that this slower pace of growth (the US economy grew at a pace of 3.0% in Q4 2011) has with regard to the US Federal Reserve monetary policy.
The Fed was slightly brighter in its analysis of the US economy last month but is highly likely to remain in ‘wait and see mode’ for the foreseeable future. Bernanke has repeatedly put the brakes on any over-optimistic projections of US growth and has reminded the market that if the pace of US growth softens further from its current moderate pace and progress on the labour market issue stagnates, then QE3 is still very much on the table. Every time Bernanke emphasises the possibilities of QE3, the dollar sells off as risk appetite is boosted and investors chase higher yielding assets, such as the Australian dollar or stocks and shares.
The US dollar has found some favour in the past couple of sessions, helped by a stronger US manufacturing figure. However, a slide in the EUR/USD pair as a result of poor growth figures from the eurozone (Italy in particular) has proven more influential.
It has been difficult calling a top to the GBP/USD’s recent rally in the year to date. It must be said that with the recent poor UK growth figures in mind, doubts are likely to creep in with regard to the likelihood that the MPC will resist further QE this year. This may make this pair’s 8-month high of $1.63 a tough level to breach. We continue to anticipate that EUR/USD will fall through the $1.30 threshold this quarter and whilst sterling should hold up better against the dollar by comparison, a significant decline remains likely. Therefore, we are anticipating GBP/USD to ease back towards the $1.60 level, from the current rate below $1.62.
Richard Driver
Currency Analyst
Caxton FX
The Office of National Statistics (ONS) last week announced the disappointing news that the UK economy contracted by 0.2% in the first three months of 2012. Taken with Q4 2011’s 0.1% contraction, this latest GDP figure signalled the UK having entered a technical recession. Nonetheless, sterling continues to enjoy strong demand as circumstances worsen on the continent.
The US dollar is still struggling to capitalise on its economy’s comparative strength. US growth data has fallen off its impressive uptrend somewhat, as shown by April’s softer unemployment figures and the recent undershoot in the first quarter US GDP figure.
This has played into the hands of the more cautious members of the US Federal Reserve, including Chairman Ben Bernanke, who refuse to rule out the possibility of another round of US quantitative easing. The market is becoming increasingly obsessed with the Fed’s monetary policy outlook and ongoing QE3 speculation continues to hurt the dollar’s performance.
The eurozone’s debt and growth situation is looking no better and worryingly, perhaps as a result of this lack of progress, the eurozone has become embroiled in fresh political uncertainty. French President Nicholas Sarkozy, could well suffer electoral defeat on the 6 May, whilst Greece will be holding parliamentary elections on the same date. Both elections could have significant ramifications on the direction of eurozone debt crisis in the short and long-term.
GBP/EUR
April saw sterling finally break away from the €1.21 level that had proven so sticky in the year to date. News out of the eurozone has been distinctly negative of late but unusually, the latest direction in this pair wasn’t predominantly euro-driven, but the result of much-improved sentiment towards the pound.
Economically, the situation in the UK remains extremely shaky. While April’s growth figures from the manufacturing, construction and services sectors were all encouraging and retail sales growth was staggeringly strong, the UK GDP figure for Q1 revealed a disappointing 0.2% contraction.
The market appears to be more than a little sceptical with regard to the ONS’s findings and will be looking for an upward revision to the GDP figure on 24 May. Regardless, the headlines surrounding a ‘double-dip recession’ are likely to weigh on consumer and business confidence alike.
UK suffers the double-dip
Whether or not the UK is indeed in a technical recession, UK growth will remain extremely weak in 2012. Disappointingly, Moody’s has recently placed doubt over the likelihood of any economic boost to the UK as a result of the London Olympics in the summer. The eurozone crisis continues to pose the greatest risk to the UK economy. As shown by the latest UK manufacturing figures, export orders are slowing and the eurozone’s economic contraction will undoubtedly drag on domestic activity.
The good news for sterling, however, is that its appeal is not based on economic growth potential. Sterling still represents a convenient alternative to investors looking to exit the euro but stay within Europe. Sterling is also a currency over which there is no threat of intervention looming (unlike the Japanese yen and the Swiss franc).
Despite the recent double-dip headlines, the UK government has reiterated its commitment to the austerity path, in order to maintain the faith of both the credit rating agencies and investors, thus keeping borrowing costs low. As a result, sterling’s ‘second tier’ safe-haven status has really come to the fore in the past few weeks and will provide plenty of support as the debt crisis rolls on.
MPC steps away from QE
Most importantly, sterling is now a currency over which there is perceived to be a reduced threat of quantitative easing, which contrasts particularly with the US dollar. The minutes from the MPC’s April meeting revealed that Adam Posen did not vote for additional QE, which took the market very much by surprise and left only David Miles as the solitary voter for additional monetary easing.
After a slight increase in UK inflation up to 3.5% in March, the MPC increased its medium-term inflation projections. The MPC’s apparent preoccupation with UK price pressures, over and above the state of UK growth, has seen bets on the likelihood of further QE from the BoE scaled back. With the MPC likely to remain in wait and see mode’ at its May meeting on 10 May, the pound has gone from strength to strength. Beyond this month though, there remain significant risks that the more pro-QE arguments will resurface to haunt the pound.
Downside risks to the euro
With regard to the single currency, events in the eurozone over recent weeks have certainly weighed on confidence, though not as much as one might expect. Growth data from Germany, France and the eurozone as a whole disappointed in April and another quarterly contraction is likely to be announced on 15 May. This will put the eurozone in the same boat as the UK - in technical recession. However, there’s no doubt the eurozone faces greater downside risks to growth than the UK moving forward and its recession is almost certain to continue through Q2.
Last month’s Spring IMF meeting failed to convince the markets that EU leaders have a proper handle on the EU’s ongoing crisis. The region’s ‘financial firewall’ has been bolstered by a further $430bn, which is a significant development. However, rating agency S&P has recently seen fit to downgrade eleven Spanish banks, which has seen Spanish and Italian 10-year bond yields make their way back up towards the dangerous 6.00% mark -a good bellwether of rising market tensions.
These rising tensions can largely be put down to fresh political concerns. 6 May brings the second and final round of the French presidential election. Nicholas Sarkozy is facing a likely defeat by Socialist candidate Francois Hollande, which places huge uncertainty over the EU’s Franco-German leadership, the EU’s fiscal compact and its ‘austerity first’ position.
Meanwhile in Greece, parliamentary elections threaten to prevent the country’s two leading pro-bailout parties from securing a majority, which again casts uncertainty over Greece’s bailout situation. In addition, the Dutch government’s collapse as a result of disagreements over austerity measures is telling of a growing political discontent across the region. There is a significant risk that the austerity backlash could spread to the UK local elections this week but the government is nonetheless unlikely to be derailed on its commitment to deficit-reduction.
GBP/EUR has climbed by over 2.50% in the past month, hitting fresh multi-month highs up to this week’s peak above €1.23 (the highest since July 2010). We are looking for further gains in the rate as conditions in the eurozone continue to deteriorate, with the €1.25 (80p) level representing the first key target.
GBP/USD
The US dollar remained soft in April, hemmed in by weaker US economic data and ongoing dovish rhetoric from US Federal Reserve Chairman Ben Bernanke. The monthly US jobs figure for March revealed that half as many jobs were added to the payrolls compared to February and US GDP data for the first quarter of 2012 came in at a disappointing 2.2% (annualised), against expectations of a 2.6% reading. Clearly the US economy is recovering at a far stronger pace than what we are seeing in the UK but it is the implications that this slower pace of growth (the US economy grew at a pace of 3.0% in Q4 2011) has with regard to the US Federal Reserve monetary policy.
The Fed was slightly brighter in its analysis of the US economy last month but is highly likely to remain in ‘wait and see mode’ for the foreseeable future. Bernanke has repeatedly put the brakes on any over-optimistic projections of US growth and has reminded the market that if the pace of US growth softens further from its current moderate pace and progress on the labour market issue stagnates, then QE3 is still very much on the table. Every time Bernanke emphasises the possibilities of QE3, the dollar sells off as risk appetite is boosted and investors chase higher yielding assets, such as the Australian dollar or stocks and shares.
The US dollar has found some favour in the past couple of sessions, helped by a stronger US manufacturing figure. However, a slide in the EUR/USD pair as a result of poor growth figures from the eurozone (Italy in particular) has proven more influential.
It has been difficult calling a top to the GBP/USD’s recent rally in the year to date. It must be said that with the recent poor UK growth figures in mind, doubts are likely to creep in with regard to the likelihood that the MPC will resist further QE this year. This may make this pair’s 8-month high of $1.63 a tough level to breach. We continue to anticipate that EUR/USD will fall through the $1.30 threshold this quarter and whilst sterling should hold up better against the dollar by comparison, a significant decline remains likely. Therefore, we are anticipating GBP/USD to ease back towards the $1.60 level, from the current rate below $1.62.
Richard Driver
Currency Analyst
Caxton FX
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