GBP/EUR recovers the €1.25 level and
should head higher
This week’s quarterly inflation report will be very
closely watched for an insight into where the MPC is standing with respect to
the option of introducing further quantitative easing. Much to the relief of
the pound, the committee declined the opportunity to take this measure at its
monthly meeting last week. The UK services growth figure for October was disappointing
and triggered some speculation that the BoE would take a safety-first approach,
but it seems they placed greater weight on the recent positive Q3 UK GDP figure
(1.0%).
We think the MPC will be too concerned with upside
risks to inflation (which should be highlighted by a tick higher in Tuesday’s
monthly CPI figure), backed by an underlying faith that the UK economy is
genuinely in recovery mode now. More clarity on this issue will be provided by
this week’s major UK data releases; Wednesday brings what is likely to be yet
another positive UK labour update, while Thursday’s retail sales figure may
provide a little more cause for concern.
A retreat in BoE QE bets has helped sterling to regain
a grip on the €1.25 level in recent sessions. Whilst this rate has headed lower
than we expected in the aftermath of the ECB’s bond-buying pledge and subsequent
period of market relief, we do maintain significantly higher targets for sterling
over the coming weeks and months.
US
fiscal cliff worries underline positive US dollar outlook
The fiscal cliff issue is really weighing on market sentiment
at present. The recent elections maintained the political status quo in the US,
which means we are no closer to breaking the deadlock that could deal a major blow
to the global economy. Combined with nervousness surrounding Greece and the
risks of default, the fiscal cliff issue has boosted the safe-haven US dollar,
helping it to rally against both the euro and the dollar in recent sessions. We
expect sterling’s downtrend against the greenback to persist in the coming
weeks.
Eurozone growth and Greece combine to weaken the euro
The flow of below-par eurozone growth data has been
ominously steady this month. Germany appears to be in some real trouble, which
is likely to once again be highlighted by Tuesday’s key German economic
sentiment survey. Thursday brings a whole raft of eurozone GDP data, which will
further highlight the downturn seen in France and Germany in the third quarter,
as well as revealing another quarterly contraction for the currency bloc as a
whole.
Weak eurozone growth has been put to the bottom of the
agenda throughout this year but it is definitely starting to hurt the single currency
now, particularly with Germany seemingly being dragged into the quagmire.
Greece is the key eurozone issue hurting the euro at
present. We have had some relieving developments in the past week with Greece’s
parliament approving major austerity measures as well as more belt-tightening
within PM Samaras’ budget for next year.
However, there is still a distinct air of uncertainty in the financial
markets over the country’s debt situation and its future within the euro. Realistically,
it will take the release of the next €31.5 aid tranche to really ease investor
concerns of an imminent disaster. A bond repayment is due on Friday, one which
Greece cannot at present afford, so market tensions will remain elevated in the
coming sessions.
End of week forecast
|
GBP /
EUR
|
1.2550
|
|
GBP /
USD
|
1.5800
|
|
EUR /
USD
|
1.26
|
|
GBP /
AUD
|
1.5150
|
Richard Driver
Currency Analyst
CaxtonFX
