US growth
data pointed to a marked slowdown in Q3, which prompted the US Federal Reserve to
finally deliver the long-awaited QE3 in mid-September. This has helped to keep
the dollar on the back foot for much of the last month. The prospect of another
round of QE to boost the world’s largest economy allowed US and European equities
to maintain their summer momentum, never an environment conducive to
dollar-strength.
The ECB’s
pledge to purchase unlimited quantities of distressed debt (particularly Spain’s)
and the Germany Constitutional Court’s approval of the European Stability
Mechanism, which has been launched this week, also eased market worries and weakened
demand for the safe-haven US dollar. This all coincided with a solid upturn in
UK data; growth in August particularly picked up around the Olympics and GDP
data for Q2 was revised up to an improved -0.4%.
However, some
poor UK growth figures in the past week from the manufacturing and services sector
in particular have taken the edge off the GBP/USD rate. Investors are once
again stepping up their bets that the BoE will decide in favour of further QE
in its closely watched November meeting. Much will depend on the initial UK GDP
for Q3, which is released on October 25. The NIESR’s estimate this week of 0.8%
growth may be a little too punchy.
Eurozone
frustrations are now creeping into some dollar-strength. Spain is dragging its
heels on requesting a bailout, while there remains uncertainty surrounding
whether or not Greece will receive its next bailout tranche and whether we will
see another Greek debt restructuring. In addition, we have seen plenty of evidence
that not only is the eurozone heading into a recession, but that Germany could
well be unable to resist this downward spiral. Some distinctly gloomy growth
forecasts for the global economy from the IMF have also weighed heavily on market
sentiment this week.
The
combination of renewed weakness in UK data and renewed eurozone concerns saw
the GBP/USD pair top out at $1.63 last month. This level represented a one-year
high and GBP/USD’s resounding failure to breach this benchmark has resulted in
a fairly sharp decline to $1.60, where it is currently finding support.
We expect
the dollar to maintain the ascendancy in the fourth quarter, which should force
the GBP/USD rate to make a sustained move below the $1.60 level in the short-term.
Beyond this, we see the rate closer to $1.55 by the end of the year. There is
plenty on the horizon to be nervous about; the US election and fiscal cliff,
Spain (including probable credit rating cuts), Greece and global growth, which
should all filter into a stronger US dollar. This baseline scenario of a lower
GBP/USD rate relies on a decline in the EUR/USD rate and a continued loss of momentum
in global equities, both of which we are sticking to. One major caveat to this positive
outlook for the USD is that at some point in the coming weeks, Spain looks
likely to bite the bullet and request help, which will likely give the euro a
temporary lift and hurt the USD.
Richard Driver
Currency Analyst
Caxton FX
