Morning Report

Richard Driver, Analyst Data yesterday revealed that the UK economy shrank in the final quarter of 2011 (by 0.2%). Sterling didn’t suffer as a result though, the market clearly feared an even worse figure. The MPC minutes, whilst showing some differences of opinion, added to expectations that the Bank of England will step up its quantitative easing programme next month. Elsewhere, the US dollar weakened off as the Fed committed to keeping its interest rates at record lows until late 2014, well beyond the initially promised mid-2013. The markets are likely to continue to mull over last night’s news from the Fed.
STERLING/EURO: Sterling once again came under pressure, though not necessarily due to the poor UK GDP figure. Data yesterday revealed that the UK economy made its first step towards a technical recession last quarter (two consecutive quarters of negative growth are required to be officially in recession). The -0.2% figure was slightly worse than median forecasts, though clearly better than many had feared going into the release. The UK services sector just about avoided contraction, but the same cannot be said of the construction and manufacturing sectors. We are still waiting on deal from Greece on the debt swap, hopes have been raised that we will see an agreement by the end of this week but we are more than likely to be disappointed. Sterling benefits from some decent support at the current levels of €1.1950, so risks are to the upside here.	FORECAST
STERLING/US DOLLAR: Sterling makes some more impressive gains as a result of a dovish US Federal Reserve statement and press conference. The news that US interest rates will stay at their current record lows until the end of 2014, a year and a half longer than indicated last year, had the logical impact of weakening the US dollar yesterday. Hopes for more quantitative easing will have been stoked by last night’s dovish performance from Fed Chairman Ben Bernanke, though it is doubtful that this will be utilised whilst US figures continue on their current uptrend. As far as the MPC minutes were concerned, there was no unanimity on the need for further QE next month, though there was enough evidence of support for a February move. Sterling is trading at $1.57 this morning, which again represents a strong level in the context of the past two months. We may see a pullback today though.	FORECAST
EURO/US DOLLAR: This pair received another welcome boost as focus moved from eurozone concerns to the Fed’s dovish interest rate outlook.  Eurozone debt concerns have been put on the backburner somewhat in the past day, as the market zeroed in on US Federal Reserve monetary policy. Bernanke reminded the markets that the US economy is not out of the woods yet; it certainly had a strong fourth quarter but remains vulnerable to volatile events in the eurozone. This pair is trading at a strong $1.31 this morning, which represents a six week high. We are still betting that this pair will return to levels below the $1.30 benchmark before too long.	FORECAST
STERLING/AUSTRALIAN DOLLAR: Despite a slightly more dovish Reserve Bank of New Zealand interest rate outlook, the kiwi gained more ground on the Fed news. Investors commonly pursue the carry trade; this is where they borrow at low interest rates close to zero (as we are seeing with the dollar in the US), and park those funds in a higher yielding currency such as the Australian dollar (which currently offers a 4.25% interest rate). It is little surprise that the Fed’s announcement of “low rates for longer” gave a boost to risky assets. Accordingly, sterling stooped to new record lows against the aussie dollar down near 1.4750 and this pair is likely to remain under pressure.	FORECAST
STERLING/NEW ZEALAND DOLLAR: Further gains in Asian stocks and sterling weakness this morning has seen this pair lose ground. The RBNZ kept interest rates on hold at 2.50% last night as expected. However, the rhetoric changed from “on hold for now” to “on hold,” suggesting that the RBNZ is happy with the current rate and not looking to hike any time soon. Governor Bollard noted that the stronger NZ dollar is hurting kiwi exports, which could well deter the market from sending the dollar too much higher. This pair is trading at 1.9150 this morning and a test of the 1.90 benchmark seems likely before long.	FORECAST
STERLING/CANADIAN DOLLAR: This pair was range-bound despite some stronger than expected Canadian retail sales data. The loonie benefitted from hefty gains in US stocks yesterday, as risky assets boomed in response the news from the Fed. Durable goods data is likely to be strong today, which will reflect well on the Canadian economy. This pair remains in range despite the news from the Fed. A move lower here still looks a good bet.	FORECAST
This post is prepared by Caxton FX Ltd for information purposes only and may contain personal views that are not the opinion of the company. This is not an offer to purchase or sell any security or an investment advertisement. Caxton FX Ltd is authorised and regulated by the Financial Services Authority, although foreign exchange transactions with Caxton FX are regulated by HM Revenue and Customs. This email does not constitute advice for any foreign exchange transaction, nor is it intended as a solicitation for funds or recommendation to trade.