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

US dollar finding its feet at last The US dollar has enjoyed itself in recent sessions, amid returning eurozone frustrations and a surprise drop in the US unemployment rate. Last Friday saw the US jobless rate drop to 7.8%, which is the lowest level seen since January 2009. The labour market report was by no means glowing but it did point to growth, which is a becoming a worryingly absent feature in many major economies. Labour market progress wasn’t the only source of optimism. This month’s US services sector figure was the best seen in six months, while the US manufacturing returned to positive growth territory for the first time in four months. Clearly the US economy faces major headwinds but the absence of further deterioration has helped the dollar to bounce back in the past three weeks or so. Concerns over the eurozone situation have also been a key factor behind the US dollar’s resurgence. PM Rajoy has resisted market pressure to request a bailout and in doing so has failed to reduce the uncertainty that surrounds the situation. On a more positive note, newswires are full of reports that Greece will receive its crucial next tranche of aid in November, though the market remains edgy on speculation of another Greek debt restructuring. Investors are unlikely to welcome more haircuts. The IMF has chimed in with some global growth forecasts this week and the picture does not look pretty. Assessments of Spanish and Italian GDP were bleak with estimates of 1.5% and 2.3% contractions this year. The IMF expects China to avoid a hard-landing, though the slowdown will still be significant, while growth in other BRIC nations provides plenty of reason for investors to be cautious. UK data disappoints but Q3 GDP should provide some optimism This month’s updates from the UK manufacturing, construction and services sector all disappointed, revealing a post-Olympics slump. This wasn’t enough to prompt the BoE into any further emergency easing measures in its October meeting, though bets have since increased on the prospects of more quantitative easing in November. We are still expecting a decent showing from the Q3 UK GDP figure at the end of the month. Indeed a leading think tank has today suggested a 0.8% result on the 25th October. Sterling is trading off its recent lows of €1.2350, which represents 81p in terms of EUR/GBP. Sterling is now trading over half a cent higher and we do see it heading higher within its range in the coming few sessions, provided we don’t see any major headlines of progress from the eurozone. Against the US dollar our outlook for sterling is rather less optimistic. GBP/USD has today lost grip of the $1.60 handle, dipping below this psychological level for the first time in a month. We expect the recent $1.63 high to represent a ceiling, but current levels are still strong as far as buying dollars are concerned. Our year-end forecasts for GBP/USD bring the rate much closer to $1.55. End of week forecast GBP / EUR 1.2450 GBP / USD 1.5900 EUR / USD 1.2770 GBP / AUD 1.5900 Richard Driver Currency Analyst Caxton FX