Finally the Fed reduces stimulus, but this failed to spark much reaction

After months of speculation regarding the likely timing of tapering, it finally came, with the Fed withdrawing $10bn in stimulus which is set to begin next month. Although not many economists predicted such a move, the announcement failed to trigger any significant movement, and both equities and emerging markets weathered the storm quite well.

The Fed has successfully convinced the market that tapering should not be confused with a tightening of policy. An adjustment to forward guidance reinforced this point, with the bank stating that loose monetary policy will remain, even after unemployment has reached 6.5%. A mere $10bn reduction in stimulus is hardly substantial and this may be part of the reason why equity and emerging markets appear unmoved by the news.

The day that the markets had been dreading seemed almost like a non event. Some might argue that this is a positive thing. We witnessed the effects taper talk had on the emerging market currencies with the Indian Rupee being one of the worst victims of a selloff. This suggests that all the speculation and the delay between September and December prepared the markets well for what was coming, unlike last summer when the markets were caught off guard.

Sasha Nugent

Currency Analyst

Caxton FX

What is more important? Rate increases or price stability?

It has now become common knowledge that the UK recovery is taking hold, and the next hurdle for the economy is to ensure this recovery can be sustained. The BoE have outlined in their forward guidance, that unless any of the thresholds are breached, they will maintain their current dovish stance, and re-evaluate policy once the unemployment rate has reached 7%.

Since the introduction of forward guidance, the markets have had their eye on the inflation and unemployment rate looking for signs to gauge the BoE’s next policy move. The labour market has improved faster than projected and inflation has also eased more quickly towards the BoE’s target of 2%y/y. In situations where unemployment figures surprised the market to the upside, demand for sterling increased, strengthening the pound. When lower inflation numbers have been revealed, sterling has taken a hit, as this dampened investor’s expectations of a rate increase in 2015.

Despite criticism, it is looking more like the central bank will not be forced to raise interest rates. Loose monetary policy has helped to support the recovery which continues to gain traction, all whilst price pressures have eased, now only 0.1% away from the target. Domestic demand is likely to strengthen, resulting in an upward pressure on inflation, but for the time being the BoE now has more room to maintain a policy which seems to be working.

A few months ago the market believed that inflation would remain above target forcing the central bank to take action and raise interest rates. With inflation easing, the BoE is no longer under pressure to do so, and the market seems to be forgetting that despite the dampened expectations of a rate hike, inflation that is in line with the central bank’s target is a good thing. Yesterday CPI unexpectedly came in below expected at 2.1%y/y and this immediately resulted in sterling weakness. What we saw was the pound being penalised for inflation trending towards the central bank’s target.

Sasha Nugent

Currency Analyst

Caxton FX

Caxton FX Weekly Report: Fed in Focus

Another week of vulnerability for sterling

Sterling looked less robust last week as a firmer euro managed to direct the rate below 1.19, and finally investors began to respond towards solid US data. This week, inflation and unemployment figures will be released and after comments from BoE member Weale regarding softer inflation, this figure will be watched carefully. Price pressures have eased significantly, and this has dampened expectations that the central bank will need to raise rates soon. Despite the pick-up in economic activity, lower inflation will allow the central bank to fulfil their commitment to maintain low interest rates in order to help absorb slack in the economy. Unemployment has been improving faster than the BoE has predicted and claimant count figures on Wednesday should also support the brighter labour market in the UK. The Bank of England will release the monetary policy minutes from their last meeting, and this should shed some more light on whether the MPC’s view about the UK has changed since the inflation report. Although it is unlikely that the MPC’s stance has changed dramatically, any significant comments here will most probably cause some volatility. Other figures such as retail sales and current account data may also offer sterling some support this week, however it will not be easy to rebound considering the heavy calendar for the eurozone and the Federal Reserve monetary policy meeting this week.

The euro bulls return

Today’s Eurozone PMI figures kick started a week packed with eurozone data. With the bullish euro investors managing to dictate trading in both EUR/USD and GBP/EUR, it doesn’t seem like things will be any different for sterling this week. The euro is still preventing the pound from driving the rate back up to 1.19 and we doubt the market will hesitate on putting more money into the euro if data provides upside surprise. It will most probably be more difficult for the euro to gain against the dollar despite some solid numbers. With the Federal Reserve’s monetary policy announcement on Wednesday, we may begin to see the single currency suffer at the hand of some investor repositioning just in case the Fed decide to surprise us with the beginning of tapering. There is more opportunity for the euro to gain against sterling this week, however if the Fed hold of tapering this month, this could provide the euro with another opportunity to drive the EUR/USD rate through 1.38.

All eyes on the Fed meeting

We are beginning to see signs that the market has begun to pay more attention to the more positive US figures we have seen of late. With the Federal Reserve monetary policy announcement only days away, US data will play an even more significant role in encouraging investors to reposition their portfolios towards the dollar. Although the case for a December taper has been building, many economists believe the Fed will begin to reduce stimulus in January. Therefore, if the Fed refrains from tapering this month, we doubt the market will respond by selling the dollar as aggressively as they did in September. It is likely that the greenback will experience some temporary weakness, however investors will eventually begin to prepare for a January taper. This is a fundamental week for the dollar and direction of both EUR/USD and GBP/USD hangs in the balance of the Federal Reserve announcement on Wednesday.

End of week forecast

GBP / EUR	1.1855
GBP / USD	1.6250
EUR / USD	1.3720
GBP / AUD	1.8350

Sasha Nugent

Currency Analyst

Caxton FX

The effects of a strong Aussie begin to show

For months now the RBA have highlighted their concern about a strong Australian dollar and we are now seeing the effect this is having on the Australian economy.  The stronger Australian dollar has caused manufacturing costs for car manufacturer General Motors to rise, and this coupled with a small domestic market encouraged the firm to stop producing cars in Australia from 2017. The US car producer Ford announced that it would stop making cars in Australia earlier on this year, and the new move from General Motors now poses a threat to the car industry which has increased the importance of retaining Toyota’s business.

Prime Minister Tony Abbott is holding talks with car producer Toyota in an attempt to convince the firm to continue to manufacture motors in Australia and prevent potentially thousands of job losses. This emphasizes the strain a strong currency is having on business costs, making foreign made cars more appealing to consumers. After the numerous failed attempts at talking down the Australian dollar, comments from RBA Governor Stevens regarding intervention finally got the ball rolling. More Aussie weakness is needed, however with the GBPAUD rate currently at 1.83, the rate is moving in the right direction.

Sasha Nugent

Currency Analyst

Caxton FX

What to take from Chancellor Osborne’s Autumn Statement

This morning the Chancellor George Osborne presented his Autumn statement and emphasised that the “economic plan is working but the job is not done”. The chancellor highlighted the impressive improvements in growth, unemployment, inflation pressures and forecasts which suggest these developments will continue. The key points are below:

UK Growth

• The Office of Budget Responsibility (OBR) now project growth this year will be 1.4%, raised from an expected 0.6% in March. 
• Next year’s forecast has also been revised upwards to 2.4% from 1.8%, with the following four years growth expected to be 2.2%, 2.6% 2.7% and 2.7%. 
• The OBR have shed light on the risks to growth, claiming the eurozone will shrink 0.4% this year. 
• Unemployment is expected to fall to 7% in 2015 and 5.6% by 2018, with an expected 400k additional jobs. 
• Private sector job creation will reach 3.1m by 2019 according to estimates. 

Public Finances 

• OBR have revised underlying public sector net borrowing down to 6.8% down from 7.5%, dropping to 5.6% next year, and predicts a small budget surplus by 2018. 
• The Borrowing forecast is down by £73bn in the next few years, with an estimated £111bn being borrowed this year and £96bn next year. 
• The chancellor has introduced a cap on welfare spending, however this excludes pensions. 
• There will be an updated charter of budget responsibility to be presented to the parliament next year. 
• Pensions will rise by £2.95 a week from next April, and the state pension age will rise to 68 in the mid-2030s, up to 69 in the mid-2040s. 

Taxes

• From 2015 capital gains tax on home purchases/sales from non-residence will be introduced. 
• The Bank Levy will increase to 0.156%, raising an additional £2.7bn next year and £2.9bn a year for 2015-16. 
• There will be further tax breaks for shale gas, with the tax rate being halved on early profits. 
• Up to £1000 tax allowance will be transferable between married couples. 
• Jobs tax to be abolished for people aged under 21. 

Businesses

• Rate relief scheme for small business will be extended for another year. 
• There will be a cap increase on business rates at 2% from next year. 

Living standards

• The freeze on fuel duty will continue, meaning next year’s planned rise will be cancelled. 
• Green levies on energy bills will be rolled back, therefore cutting £50 from bill increases. 
• Average rail prices will be kept constant in real terms.

Sasha Nugent

Currency Analyst

Caxton FX

December 2013 Currency Report: Sterling bulls put the pound in charge

Sterling has made quite a comeback in the last month, exceeding levels we saw in September when UK data was consistently providing upside surprise. The BoE Inflation Report released a few weeks ago increased demand for sterling as the prospects of a rate increase was pushed forward to 2015. This coupled with last month’s Services PMI figure which showed the sector grew at the fastest pace in 16 years encouraged the sterling bulls to shoot the GBP/EUR rate through to 1.21, whilst the GBP/USD has breached 1.64.

After the ECB unexpectedly cut rates last month in response to lower inflation figures, the euro has been on the back foot against both sterling and the dollar. Recently there has also been talk about negative deposit rates and whether the central bank will ease monetary policy further. Although the ECB still believe inflation is still well anchored to their medium to long term expectations, the possibility of these moves will limit a recovery for the euro.

The last US non-farm payroll figure reignited the tapering debate and opened a small window for a December taper. If the payrolls figure due this week follows suit, we might just see the Federal Reserve begin to cut back asset purchases this month. For now though, the market requires some significant positive US data in order to support the dollar and gauge the likely timing of the next policy move from the Fed.

Sterling regains ground

This month sterling has definitely kick started things in a better position and there is more hope that the pound may be able to retain this momentum against the euro in the coming weeks. Last month’s Services PMI number got the ball rolling, with the figure rising to 62.5, the sharpest increase in 16 years. The level of new business rose at record pace, and this encouraged investors to begin to buy sterling once again. The latest Manufacturing PMI also beat estimates and support continues to build for the pounds. The key driver behind sterling’s recent gains has been the BoE inflation report which expressed optimism about the UK recovery and opened the possibility of a rate rise in 2015. The monetary policy committee believe that unemployment
will reach 7% by the end of 2015, and that despite a surprisingly lower inflation number, price pressure in the medium term are still well anchored. The market has kept its focus on the possibility of a rate hike in 2015 and this has been the backbone of sterling’s momentum. It wasn’t too long ago when we saw cable breach 1.63 and the GBPEUR rate test the barrier of 1.20. PMI data this week will help to set the trend for sterling strength this month, and together with some strong unemployment data, the pound should be well supported.

GBP/EUR

More dovish talk from the ECB should keep sterling in control of GBPEUR

The ECB certainly had a hand in recent euro weakness. Eurozone inflation slowed to 0.7% y/y and this prompted an unexpected rate cut from the ECB. This move set the tone for the euro and it is unlikely that the euro will be making any major recovery soon. It recently came to light that the ECB discussed negative deposit rates, and although ECB President Draghi was quick to express that those talks had gone no further, ECB’s Hansson did say that the central bank still has room for further easing. The market seems to have adjusted to the prospect of looser monetary policy from the ECB however as long as this possibility remains those bearish euro investors will keep their finger over the sell button. The ECB have also said that the medium to long term inflation expectations are well anchored and based on this we doubt we will see another rate cut from the central bank when they meet this week.

A much better set of economic data could benefit the euro this month. Last week we saw German IFO data provided the euro with some temporary relief, highlighting investors thirst for such positive numbers. With the euro set to remain on the weaker side for a while yet, upside surprise on economic figures could provide the single currency with pockets of opportunity to build momentum and improve sentiment about the economic climate. Considering German Ifo was enough to push EURUSD back above 1.35, there are still some market participants ready to put their money in the euro when given a reason to. For now though, the UK economic backdrop is looking much more stable and with continued talk of loose monetary policy, coupled with uninspiring data, sterling looks set to control this rate in the month ahead.

GBP/USD

To taper or not to taper?

The tapering debate has been going on for months now, and after the Federal shutdown dampened expectations it could happen this year, the last employment report reopened the possibility of a December taper. We know that the Federal Reserve require more evidence of a strong US recovery in order to warrant a withdrawal of stimulus and therefore the employment report will be (as usual) a focal point, and will most probably set the trend for the month. After the last non-farm payrolls release surprised to the upside, any figure in line, or above estimates should increase speculation about the possibility of a reduction in stimulus beginning this month.

In recent sessions we have seen the dollar take a beating after US figures produced some mixed results. At this moment in time, investors are penalising the dollar for data that isn’t meeting expectations and also for the fact that the timing of tapering continues to be pushed back. We may see more of this in December, especially if non-farm payrolls disappoint. Looks like another month of data watch for the dollar.

The Fed chair nomination vote will also grab the market’s attention, and last month nominee Janet Yellen was questioned by the Senate Banking Committee. With the majority of the Senate democrats, Yellen only needs a few votes from republicans to secure her position as Chairwoman of the Federal Reserve. If the Fed decide to keep policy on hold for another month (which is likely), the market will then look to the end of the first quarter for the Fed to begin cutting back their asset purchases.


GBP/EUR: 1.2150
GBP/USD: 1.6210
EUR/USD: 1.3400

Sasha Nugent
Currency Analyst
Caxton FX

 

Caxton FX Weekly Report: The pound directs GBP/USD and GBP/EUR higher

The Bullish Sterling Investors surface

Last week the pound showed its strength, and sent the GBPUSD rate straight through 1.63 after the second GDP estimate prompted investors to buying the pound. This strength has continued so far this week, and maintaining this in current sessions will partly depend on the performance of Construction and Services PMI figures due in the next few days. Another solid set of numbers here should encourage more sterling momentum and will put increasing pressure on both the euro and the dollar. GBP/EUR is looking more comfortable around the 1.2090 level and after sterling dipped above 1.21 we could see these levels remain in the days ahead. The Bank of England will announce its rate decision on Thursday and it is unlikely that the central bank will alter monetary policy. At the moment it looks like it could be another week for the pound to extend recent gains.

What tools will the ECB pull out next?

After all the talk about the next possible policy move from the ECB, Thursday the ECB monetary committee will meet and they will announce their interest rate decision. After last month’s surprise cut, it is unlikely we will see any change in the interest rate when they meet this week, however what will be of more interest, is the press conference to follow. The issue of low excess liquidity for European banks remain, and the mystery of whether the central bank will opt for another LTRO remains. There has also been some talk suggesting that maybe the ECB should consider quantitative easing. A tool that the central bank has avoided and the BoE and Federal Reserve have embraced. The press conference should provide some clarity on these topics and if none are on the horizon, we should see some of the pressure on the euro ease.

Services PMI data will be released this week and could offer the euro some short term relief after a period of weakness. However with sterling looking stronger it may not be able to recover as much as we have seen previously.

It’s that non-farm payroll time again

With GBPUSD levels now trading around 1.64, it is evident that dollar weakness will remain as long as tapering delays continue. US data last week, such as unemployment claims, has failed to do enough much for dollar strength and so market focus turns to the employment report due on Friday. The last non-farm payroll figure surprised the market and stirred speculation that the Fed could possibly begin to taper back purchases this month. This makes Friday’s figure ever more important, and a reading in line or above expectations may result in some investor repositioning. Ahead of the employment report on Friday, there is more than enough data to keep the market busy such as ISM manufacturing and non-manufacturing PMI, preliminary GDP q/q and unemployment claims. Although these numbers are unlikely to trigger significant dollar momentum, strong data could put the dollar in a much better position ahead of the jobs report on Friday.

Optimism regarding the Chinese economy has also affected the dollar’s strength. Demand for safe haven currencies such as the dollar has fallen amid signs of a pick- up in global manufacturing. It is unlikely this influence will last too long, however in the short-term, this will contribute to the greenback’s struggle to
regain ground.

End of week forecast

GBP / EUR	1.2120
GBP / USD	1.6300
EUR / USD	1.3500
GBP / AUD	1.8100

Sasha Nugent 

Currency Analyst

Caxton FX

Sterling bulls focus on GDP

This morning, UK GDP was released and as expected there was no revision to the preliminary reading of 0.8%q/q growth. The pound rallied on the back of this and sent cable shooting through 1.63. Similarly, the GBPEUR rate rose and is now fluctuating around the 1.20 level. Preliminary Business Investment figures were also released this morning and after falling 2.7%, business investment rose by 1.4%q/q below the expected figure of 2.3%q/q growth.

What is particularly interesting is that the market’s focus was on the GDP figure and the fact that business investment was below expectations meant little. In the opening remarks of the Inflation Report Press conference, Governor Carney emphasized the issue of absorbing slack in the economy, and stated that a strong and sustained recovery is needed in order to achieve this. Carney also stated that “A sustained recovery requires a revival of business investment”. Baring this in mind, it seems strange that the market’s attention is not being put on the fact that business investment growth is still slacking. The need for more robust growth has come from the horse’s mouth, yet the market feels the need to focus on a GDP reading that only confirmed what we had already known.

It is fair to acknowledge the rise in business investment and consider it positive, but surely the market needs to draw their attention towards the need for this type of investment to gain traction. A lot of sterling’s recent strength has been on the back of the possibility of a rate increase in 2015. We also know from the inflation report that we could have a situation where unemployment has reached the 7% benchmark, but the BoE maintains loose monetary policy. If the sterling bulls want to see a rate increase by 2015, they may want to pay a little more attention on the progression of factors such as business investment, which may help to gauge how sustainable the recovery is and therefore when the BoE will be likely to raise rates.

Sasha Nugent

Currency Analyst

Caxton FX 

Caxton FX Weekly Report: Talks of looser monetary policy from the ECB keep the euro on the back foot

Super Sterling Returns

Despite a light calendar, it was an impressive performance for sterling last week as CBI Industrial Order Expectations smashed estimates and drove both the GBP/EUR and GBP/USD rates higher. Levels remain elevated and there is still a chance there are some bullish sterling investors waiting for the moment to push the rate further. The main release this week will be the second GDP estimate, and any upside surprise here will most likely trigger some more sterling momentum.

On Tuesday, The BoE governor and the monetary policy committee will appear before the Parliament’s Treasury Committee to discuss the central bank’s latest inflation report. This will present an opportunity for the market to move on the MPC’s comments, especially if they reveal more about the future of interest rates. Sterling should be well supported this week but it is unlikely the big moves will come from the British side of things.

Eurozone inflation figures on watch

Last week it was revealed that the ECB monetary policy committee had discussed negative deposit rates. Although President Draghi has managed to calm the markets, it may not take much to get the topic brewing again. The key release will be the eurozone inflation figure which is expected to rise to 0.8% y/y. If the actual figure comes out significantly higher than expected, we expect more of the euro bulls to come out of the woodwork and it would be another move lower for GBP/EUR. Despite the fact that the ECB expect inflation to remain low for a prolonged period, a lower CPI reading could easily reignite talk about the possibility of negative deposit rates. This morning, there have also been comments from ECB member Hansson claiming there is room for the ECB to cut rates further. There has been some slight euro weakness on the back of these words however the market seems to have adjusted to the prospect of lower interest rates.

Eurozone figures such as GFK German Consumer Climate and German unemployment change could provide some support the euro. Last week we witnessed strong German Ifo Business Climate figures drive the GBP/EUR rate towards 1.1950 and push EUR/USD through 1.35. The same can happen again this week provided these numbers beat estimates.

The market eyeballs US data

After showing some signs of recovery, the disappointing Philly Fed manufacturing Index has placed the dollar on the back foot once again. The positive flash manufacturing PMI and unemployment claims figures were not enough to limit dollar losses, and this suggests that US data is being watched even more closely after the last FOMC minutes. With the window slightly open for a December taper, economic figures from the US need impress in order for significant repositioning to take place, and increase demand for the dollar.

First up we have pending home sales due this afternoon, and this figure could get the ball rolling for a better week for the greenback. Building permits, CB consumer confidence, Core Durable Goods orders and unemployment claims are all due this week and will receive attention from the market. With the non-farm payrolls figure due next Friday, an extremely strong unemployment claims figure should help get some dollar optimism stirring ahead of the employment report next week.

End of week forecast

GBP / EUR	1.1950
GBP / USD	1.6140
EUR / USD	1.3450
GBP / AUD	1.7720

Sasha Nugent

Currency Analyst

Caxton FX

RBA Governor Stevens takes the first steps in weakening the Aussie

After months of complaining about an “uncomfortably” high Australian dollar, RBA Governor Stevens has finally said enough to ease Aussie momentum.

The RBA’s latest monetary policy minutes, revealed that although the effects of the last rate cut are still filtering through the economy, the committee haven’t closed the door on lowering rates further. The central bank has raised the issue of a persistently strong Aussie and the potential problems this can cause for the recovery. Consequently, there have been several attempts to talk down the AUD, but this has failed to make any lasting impact. The prospect of looser monetary policy has not shaken the markets enough to encourage significant Aussie weakness.

This morning, RBA Governor Stevens claimed that he is ‘open minded on intervention to lower AUD’ and this comment got the ball rolling. GBPAUD opened at 1.7253 and has jumped over two cents to 1.7470 during trading today. The fact that Governor Stevens is ‘open’ to intervention suggests the RBA are serious about the currency’s strength, and could act to weaken the Australian dollar if need be.

Sasha Nugent

Currency Analyst

Caxton FX

More euro optimism anyone?

Even after the ECB cut rates a couple of weeks ago, there still seems to be some investors that are willing to put their money in to euros. The single currency has recovered from losses quite well recently, and even had sterling struggling to remain above 1.19 in the last session. Nothing has been particularly encouraging from the eurozone, and yet sterling has found maintaining 1.19 just as difficult as breaching and sustaining 1.20.

And then we get another reason to sell euros. Negative deposit rates!

Following the ECB’s surprise move to cut the interest rate to 0.25%, Bloomberg reported that the ECB is also considering a negative deposit rate. This spurred an unwind of euro long positions and sent the GBPEUR rate back to 1.20, while slamming the EURUSD rate below 1.35 once again. Evidence for short euro positions is building, especially against sterling where UK fundamentals are more impressive. Having said that, every time we believe it is time for the euro to continue to weaken, it finds some hidden strength and proves us all wrong. It may take more than negative deposit rates ensure the GBPEUR rate remains above 1.20.

Sasha Nugent

Currency Analyst

Caxton FX

Caxton FX Weekly Report: Sterling takes a back seat after the BoE Inflation Report

Anything more from the BoE?
The BoE Inflation Report was released last week, and although the central bank is not in any rush to raise rates, the report displayed some optimism about the UK outlook. The Bank of England revised their UK growth forecast upwards, and their inflation projections downwards (under the assumption the Bank rate follows the market rate). What the currency market particularly focussed on, was the prospect of a rate increase in late 2015. With the labour market improving faster than expected, the BoE now forecasts the
unemployment rate will reach 7% quicker than the time frame given in the August Inflation Report.

This week, the main UK release will be the Bank of England monetary policy minutes and we doubt the language in the minutes will differ much from what we saw in the Inflation Report. Although the minutes are likely to highlight the improvement in the labour market, we may see some emphasis on the headwinds the UK economy still faces. A generally light calendar for sterling leaves it open for weakness and this could allow the dollar and euro to potentially drive GBP/EUR and GBP/USD lower.

What can the euro do to regain momentum?
The euro remained on the back foot for most of last week, especially against sterling. The BoE inflation report spurred demand for the pound and drove the GBPEUR rate above 1.19. The prospect of a rate hike from the BoE in 2015 is directing this rate upwards, and in order for the euro to regain control (at least in the short term), this week’s PMI figures need to provide some upside surprise. Last week we saw evidence of a slowing Eurozone economy and so any data that suggests a pickup in economic activity should put the euro in a better position against both sterling and the dollar. With a heavy calendar ahead for the US, it will be more difficult for the euro to push EUR/USD higher. There are still some bullish euro investors around, and it is more likely that the single currency will do better against sterling than the dollar.

Will we see more evidence in favour for Dec tapering this week?
Last week the Senate Banking Committee hearing for Fed Chair nominee Janet Yellen was the main topic surrounding the dollar. Despite some dovish comments, Yellen recognised the fact that the US economy is making progress and that QE could not continue indefinitely. These remarks helped limit dollar weakness and allowed cable to trade around levels seen earlier on in the day. The dollar however, finished the week on a bad note after Empire state Manufacturing Index came in below expectations. In the busy week ahead, there is plenty of opportunity for the dollar to pare back losses and build evidence to support the Fed’s tapering case. The FOMC meeting minutes will be released and this gives the market yet another insight on the Fed’s take on the US economy. More importantly, there could also be an indication of the likely timing of tapering, which will allow investors to begin to reposition their portfolios.

End of week forecast

GBP / EUR	1.1880
GBP / USD	1.6100
EUR / USD	1.3500
GBP / AUD	1.7110

Sasha Nugent

Currency Analyst

Caxton FX

What is new in the BoE November Inflation Report?

One of the most important things to take from the inflation report is the more positive view on the economy. In Governor Carney’s words, “For the first time in a long time, you don’t have to be an optimist to see the glass as half full. The recovery has taken hold”. Strong economic figures, particularly robust PMI numbers, have encouraged a brighter outlook for UK growth in 2013 and 2014. Consequently, the central bank has raised their forecasts for growth from 1.4% to 1.6% in 2013 and from 2.5% to 2.8% in 2014.

After CPI surprisingly dropped to 2.2%y/y, the BoE now projects inflation will be considerably lower than predicted in August. Although energy price rises are likely to result in an uptick in inflation in the coming months, weak domestic price pressure and the recent strengthening of sterling will keep the inflation rate trending towards the 2%y/y target. Assuming the Bank Rate follows the path of market yields, the inflation target will be reached a year earlier.

The central bank’s outlook for the labour market has also improved and the monetary policy committee now believe that there is a two in five chance that unemployment will reach 7% by the end of next year, and a three in five chance in 2015 (assuming the Bank Rate follows market rates). Considering the MPC have used the unemployment rate as a benchmark to re-evaluate monetary policy, there is a possibility that we could see a rate hike in late 2015. However, Governor Carney repeatedly highlighted the importance of reducing slack, claiming “A strong and sustained recovery is needed to put people back in work and use up the slack in the economy”. Therefore the MPC may hold back on raising interest rates until we witness such a “strong economy”. In addition, Carney outlined that a scenario where the Bank Rate was held constant “shows the potential advantages of keeping rates unchanged after hitting 7% unemployment”.

The main thing to remember is that despite the upward revision in growth projections, and confirmation that the recovery is strengthening, it doesn’t necessarily mean a rate hike is on its way. Although the unemployment rate is expected to reach the threshold earlier than predicted in the last inflation report, in Governor Carney’s words, “what really matters is what we will learn about the economy along the journey to that threshold”. We have seen how quickly the economic picture can change, and therefore it is important for focus to remain on what this picture is showing.

Sasha Nugent

Currency Analyst

Caxton FX

The BoE may be able to keep rates low after all

Today’s inflation figure shocked the market, and has further dampened expectations that the Bank of England may need to raise rates sooner than outlined in forward guidance. CPI came in at 2.2%y/y, the lowest level since September 2012, with the deceleration attributable to lower transport costs and education costs. The pound took a beating post release with GBPUSD dropping to 1.5850 and GBPEUR dipping below 1.1850.

The central bank will publish their updated economic forecasts tomorrow, and in the light of today’s inflation reading, we could see inflation projections revised downwards. In forward guidance, the BoE committed to keeping rates low at least until unemployment was below the 7% threshold, despite above target inflation. With price pressures easing, and the economy improving, there no immediate need to raise rates, and the central bank now has more room to keep policy loose in order to continue to support the recovery.

The market had previously questioned whether the BoE will be able to keep rates low, but with inflation now at 2.2%y/y, pressure on the central bank has eased. What needs to be highlighted is that once energy prices take effect, the decline in the inflation rate is likely to be reversed and the road to achieving price stability will be more difficult.

Sasha Nugent

Currency Analyst

Caxton FX

Caxton FX Weekly Report: Will the BoE raise their UK growth projections?

Give and Take
Sterling had a good week last week as PMI figures gave the pound a solid footing to gain against its major currency pairs. Services PMI rose at the fastest pace in 16 years allowing sterling to direct the GBP/EUR rate higher. Industrial production figures also provided upside surprise and with a little help from the ECB, the GBP/EUR rate managed to breach 1.20. This week there is plenty of opportunity to see the pound build on current levels. UK inflation data is released and figures are expected to show inflation slowed for another month to 2.5%y/y. Unemployment data is also due and a continued improvement in claimant count numbers should encourage a stronger pound. The BoE will release its inflation report and this will be the main event for sterling. Optimism about the UK outlook has continued to increase and after the latest PMI numbers, we could see the Bank of England raise its projections for UK growth. More positive language from the central bank should be welcomed by the market, and we could see another push for 1.20 in the days ahead.

More euro weakness to come
The euro has already experienced some significant weakness after the ECB unexpectedly cut rates to 0.25%. Despite the large movements, we could see more weakness this week depending on the outcome of Eurozone GDP readings. Any downside surprise in these figures could possibly encourage more euro selling, and provide further justification for the ECB’s rate cut. Significant releases from the UK should also support a move to drive GBP/EUR higher, especially if the BoE raise their forecasts for UK growth. The euro has managed to reverse some losses so far today, with the EUR/USD rate climbing towards 1.34 once again, and GBP/EUR declining towards 1.19, but it is unlikely that this can be maintained in the days to come. With the window for a December taper ajar, the euro also remains vulnerable against the dollar.

Non- farm payrolls puts greenback back in the race
Non-farm payrolls came in significantly above expectations, and this has prompted some increased demand for the dollar. The figure highlighted that despite the deceleration in payrolls, the labour market is still in decent condition. Although this figure alone isn’t enough to warrant a December taper, it does open the door to the possibility which should be enough to keep the dollar in better condition going forward. Economic releases this week should also support a firmer dollar and encourage some optimism about the US economy.

On Thursday, Janet Yellen will face the Senate Banking Committee for a grilling before deciding whether to send her nomination for full Senate approval. While Yellen only needs a handful of votes from Republicans in order to pass necessary procedures when her nomination reaches the Senate, Republicans will not hesitate to scrutinise a policy which they feel is building up future inflationary pressures.

End of week forecast

GBP / EUR	1.1980
GBP / USD	1.5950
EUR / USD	1.3350
GBP / AUD	1.7100

Sasha Nugent

Currency Analyst

Caxton FX

Non-farm payrolls revives the tapering debate

The dollar experienced another boost of momentum today after non-farm payrolls beat estimates adding 204k workers vs 120k . The release highlighted that the Federal shutdown hardly had an effect on employment, and suggested that maybe the labour market is healthier than previously thought. This is likely to reignite the tapering debate. The shutdown as well as some less impressive figures from the US, dampened expectations that the Fed will begin tapering in December, and many market participants believed it was more likely to begin in the New Year. These figures have reopened the possibility of a December taper, and this should result in a firmer dollar in the weeks ahead.

Sasha Nugent
Currency Analyst
Caxton FX

Inflation figures give ECB a wakeup call

After weeks of bullish investors supporting a strong euro, the single currency has had the rug pulled from under its feet as the ECB cuts its main refinancing rate by 25bps to 0.25%. Ever since last week’s inflation figures showed inflation slowed to 0.7%y/y, there has been increasing pressure for the ECB to act against disinflationary pressures. Today was that day and inflation data was enough to tip the ECB over the edge.

A strong euro has also been an issue for discussion of late, and the decision to cut rates has forced GBPEUR to rally through 1.20 although the rate has now stabilised around 1.1990. EURUSD also took a sharp hit and is now below 1.34. Considering the ECB had no intentions to weaken the euro, it could be said that they have killed two birds with one stone.

Although the market continued to highlight the potential risk of deflation, ECB President Draghi said that despite the expectation of prolonged low inflation, medium to long-term projections are still anchored in positive territory. This suggests that there may not be a need for further cuts in the future and even if there is, the ECB has said there are still a number of tools at its disposal.

Sasha Nugent

Currency Analyst

Caxton FX

UK Services PMI delivers the goods but for how long?

Over the past last few sessions, sterling has been struggling to maintain gains against the euro. Positive economic figures from the UK have done little to push the GBPEUR rate significantly higher, and even a solid construction PMI figure couldn’t do enough to force GBPEUR beyond recent levels. Yesterday the service PMI reading increased to 62.5 and showed the service sector grew at the fastest pace in 16 years, while new orders was at its strongest level since records began. This allowed sterling to finally return to the driving seat, with the GBPEUR rate shooting through 1.19.

In order to see more substantial moves, and to ensure sterling holds up against the euro, UK data needs to provide stellar results. With the picture brightening over the past few months, evidence suggesting the recovery is building momentum has grown and optimism about the UK outlook has increased. Today we have seen solid numbers from UK manufacturing and industrial production, and mixed results from the eurozone such as falling retail sales, and rising German factory orders. Initially the GBPEUR rate rose after the release of UK data, however German factory orders were enough to erase sterling gains and send the rate below 1.19 again. This shows that UK releases that are in line, or marginally above expectations are unlikely to produce enough momentum to keep sterling competitive against the euro.

While the pressure on the euro is helping sterling to direct GBPEUR higher, a more hawkish shift from the central bank will do more to ensure an upward trend in GBPEUR. The market is already predicting the central bank may raise rates earlier than outlined in forward guidance, but for now an increase in the BoE’s economic projections released next week should be welcomed by the market. This may provide GBPEUR with more sustainable support, helping to drive the rate higher in the near term.

Sasha Nugent

Currency Analyst

Caxton FX

Caxton FX Weekly Report: Euro takes a back seat as inflation puts pressure on ECB

Can sterling remain above 1.18?
The eurozone inflation and unemployment data allowed GBPEUR to recover from levels below 1.17, to start the week above 1.18. Today, UK construction PMI beat estimates, and this has seen a slightly revival in the GBPEUR rate. Last week we saw a solid manufacturing number do little for the pound suggesting investors need more solid excuses to sell euros to see sterling really get back in its stride. The Bank of England will announce their rate decision on Thursday, and with monetary policy expected to remain on hold it is unlikely this will do much for the pound. There is plenty of downside risk against the dollar, and with fresh optimism brewing, it is possible GBP/USD could continue to trend downwards.

It’s time to let the euro take a back seat
After sessions of pushing the GBPEUR rate gradually lower, euro strength has eased, and it is now much more vulnerable that we have seen in recent weeks. The ECB rate announcement and press conference will be the key. The poor inflation figures released last week, has fuelled speculation that a rate cut may be needed in order to curb the eurozone’s problem of slowing inflation. If the ECB decide to hold rates, focus will then be on whether the central bank sees rate cuts in the future, and if not, what other tools are available. European Banks are falling short of excess liquidity and with time running out, the market will also be looking for an indication of whether these banks will be supported through another round of LTROs. For the first time in a while the euro will on the back foot, and this presents the opportunity for both sterling and dollar to dictate the direction of the GBPEUR and GBPUSD rates.

Renewed optimism supports a firmer dollar
Decent economic figures coupled with a less dovish central bank have helped the dollar start this week in better position. Whether greenback will be able to maintain these gains is largely dependent on data releases this week. Non-farm payroll is due on Friday, and economists expect this reading to show employers hired less workers before the shutdown. If this proves to be true, we may see a reversal in some of the dollar’s recent momentum as figures suggest that the pace of hiring continues to slow. After the central bank highlighted the need for more evidence to support tapering, a weak employment report even before the shutdown would rather encourage the central bank to take a slightly more dovish stance. The advanced GDP q/q reading will also be of interest, and a stronger figure here should be welcomed by the market. A dovish ECB may be enough to keep the dollar in control of EUR/USD, especially if the ECB hints that a rate cut is on the table. However, to maintain gains against sterling will be more difficult, and other economic figures such as ISM manufacturing and unemployment claims are needed to support downward movement in GBP/USD.

End of week forecast

GBP / EUR	1.1850
GBP / USD	1.5940
EUR / USD	1.3480
GBP / AUD	1.6820

Sasha Nugent

Currency Analyst

Caxton FX

November 2013 Monthly Report: US dollar stages a comeback

Sterling has remained on the sidelines for the majority of October. With some economic figures coming in below estimates, investors have adjusted their expectations accordingly, encouraging them to unwind sterling long positions. The pound is likely to remain on the back foot this month and we doubt economic figures can provide enough surprise to lure investors back into sterling. However, the latest Bank of England monetary policy minutes revealed a less dovish tone from the central bank, and if this continues, could help sterling resist a buoyant euro.

The market has been taking every opportunity to support a stronger euro, and despite some weak economic data, the single currency doesn’t seem to have run out of steam just yet. Even though the ECB outlined the importance of the exchange rate to the recovery, members haven’t displayed much concern towards euro strength. As excess liquidity in the eurozone declines, attention turns to the policy tools the central bank will use in order to support European banks.
Dollar weakness has continued into the new month despite managing to pare back some losses against both sterling and the euro. The US government standoff gave investors an excuse to sell dollars after the Federal Reserve kept monetary Policy unchanged in September. We should see the dollar begin to get back on its feet this month, as clearer data allows investors to get a better picture of the likely timing of tapering.

Not looking great for sterling in the month ahead 
It seems like the period of sterling superiority has faded, and now it is time for sterling strength to take a back seat. The market now views previous sterling strength as excessive, and with last month producing softer economic data, investors have been encouraged to reduce sterling holdings. Nevertheless the outlook on the UK economy hasn’t changed. Optimism regarding the UK recovery remains and strategists have begun to raise their forecasts for GBP/EUR. We expect solid data figures to continue in November, however in order to witness some significant sterling momentum, economic data will have to provide some significant upside surprise.
Last month we saw a slight shift in the Bank of England’s stance, and although there were no policy adjustments the central bank highlighted that unemployment has improved marginally faster than forecasted. The monetary policy minutes from the last meeting noted that it was now possible that unemployment will be lower, and growth faster in the second half of the year, than predicted at the time of the August Inflation Report. This less dovish language may be what is needed to keep sterling competitive especially against the euro this month. If the central bank continues to display a more positive tone about the UK economy (especially unemployment), it could reignite speculation about when the BoE will consider raising rates. Next week the BoE’s monetary policy committee will meet and it is unlikely that we will see any change in policy. Eyes will then await the release of the monetary policy minutes to identify whether this rhetoric has continued into November.

GBP/EUR

Euro domination
There has been a big shift in momentum in the last month, and the demand we had seen for sterling has now moved to the euro. Euro strength has become a hot topic, and although the ECB have remained dovish, their lack of concern about euro momentum has given investors the green light to buy euros. In the press conference after the last ECB rate announcement, President Draghi highlighted the importance of the exchange rate to the eurozone recovery but didn’t signal any immediate concern about the single currency’s recent strength. It was only this week that ECB member Nowotny said he doesn’t see any tool the ECB could use against the strong euro, and it is something that we will just have to deal with. With comments like that it is no surprise investors are bullish on the euro, and this against bearish behaviour towards sterling set the tone last month. Investors have disregarded some more disappointing releases from the eurozone, and penalised sterling for some poor UK numbers. However, this week eurozone unemployment data was released and showed unemployment rose to 12.2% allowing sterling to rally through 1.17 and close at 1.18. Inflation is also becoming an increasing problem, and with CPI now at 0.7% y/y, the pressure is mounting for the ECB to take action, and possibly cut rates. This may be an indication that not everything can be ignored, and some euro weakness is in sight.

European banks are running out of excess capital and the ECB has said that there are a number of tools available in order to support banks, sparking talk of another round of LTROs. In an interview, governing council member Nowotny said that it is clear that there would be a liquidity provision but refrained from outlining what measures the ECB would use. As the month unfolds, there will be more focus on this, and if one is announced, it is likely to dampen recent euro strength and edge GBPEUR higher.

The ECB has scheduled a comprehensive assessment of 124 of the most significant Eurozone banks between November 2013 and October 2014. This includes a Supervisory risk assessment, asset quality review and stress test. It is possible that banks will begin to reduce the amount of foreign currency dominated assets held, to purchase euros in an effort to clean up their balance sheet. This could begin to influence the rate also.

GBP/USD

Is the storm over?
Neither currency in this pairing had it easy last month, however the problems just kept piling on for the dollar. After more than two weeks in partial shutdown, the US government managed to raise the debt ceiling in time to avoid default, but this was only raised till February 2014. Whilst this decision removed the immediate threat of default, it was by no means a solution, and this set the dollar up for weakness. The influence the shutdown had on the economy has also affected the Federal Reserve’s decision on whether to taper their asset purchases this year.

As we enter the new month the greenback is under a little less pressure than it was in October. This week the Federal Reserve kept interest rates and asset purchases on hold for another month, as expected. In the accompanying statement, the Fed seemed optimistic, but said more evidence is needed in order to pare back stimulus. The less dovish language provided the greenback with some momentum, edging the GBP/USD rate lower. Whether we can see this trend continue is dependent upon the performance of US figures. The shutdown has given the central bank more time to assess economic conditions, and as distorted data clears the way for more accurate releases, evidence should begin to build in favour of tapering.

The September employment report revealed 148k additional workers and a decline in the unemployment rate to 7.2%, the lowest level since November 2008. October’s payroll reading is expected to be show a modest increase, highlighting the slowing trend in payrolls. The market will pay particular attention to employment figures and any indication of an improving labour market will encourage more bullish behaviour, as well as increased speculation about the timing of tapering.

In the month ahead we feel the dollar will stabilise but will remain vulnerable to some weaker data releases. This may provide sterling with pockets of opportunity to push the GBPUSD rate higher but there is a fair possibility we could see this rate marginally trend downwards this month.

GBP/EUR: 1.1875
GBP/USD: 1.5920
EUR/USD: 1.3460

Sasha Nugent
Currency Analyst
Caxton FX

Caxton FX Weekly Report: Euro domination continues

The struggle continues for sterling
Not surprisingly, the pound found last week difficult against the euro. Despite beginning the week just above 1.18, trading in this pair was pretty uneventful and the euro managed to push the rate below 1.18. The challenge remains in the days ahead and with the sterling already struggling to maintain gains it is unlikely that this week will be any different. A light calendar will make it even more challenging and the only real significant piece of data being released is manufacturing production due to be published on Friday. The figure is expected to fall slightly below the last reading of 56.7 to 56.5 but another month in expansionary territory shouldn’t do the pound any harm. The likelihood that the GBPEUR rate will be able to breach 1.18 again look pretty slim this week, however any disappointment in eurozone numbers could encourage the rate a bit higher. The dollar may also attempt to reverse some losses this week although distorted data may prevent greenback from gaining much momentum.

A robust euro set to extend gains
The euro is still marching on against the dollar, continuing to fluctuate around the 1.38 level. Investors have maintained their bullish attitude towards the euro despite some softer data releases. Considering it will be a busy week for both the euro and dollar we may see more volatility and the door is still firmly open to see the euro continue to take advantage of greenback. The ECB seem unconcerned about recent euro strength and this is also encouraging the single currency’s momentum. How far the currency can go depends on how disappointing US data is this week. On sterling side of things it is pretty much the same story. Although the euro has managed to limit sterling gains, the currency is finding it much more difficult to build momentum against the pound than the dollar. Nevertheless, the ball is in the euro’s court this week and we could see this pressure building as the week unfolds.

The possibility of further dollar weakness remains
The dollar didn’t do too badly on Friday considering the kind of weakness it was subjected to during the week. There is a whole load of US data due and it is unlikely to do the currency any favours. The Federal Reserve is due to start their two-day meeting tomorrow, and is expected to see monetary policy remain on hold for another month. We doubt this result will encourage significant dollar weakness since most
investors have already priced this in, however disappointing data could encouraging the GBP/USD and EUR/USD rates higher. It will be a while until we see the dollar really regain control of things, and any upside surprise will almost certainly encourage a little more demand for the dollar. With limited UK releases, we expect greenback to hold up better against sterling, while greater downside risk remains against the euro.

End of week forecast

GBP / EUR	1.1670
GBP / USD	1.6260
EUR / USD	1.3900
GBP / AUD	1.6800

Sasha Nugent

Currency Analyst

Caxton FX

Lose/lose situation

It was only a few months ago when we witnessed dollar domination but now with cable above 1.61 and EUR/USD reaching for 1.37, it all seems like a distant memory. Initially the Fed tapering debate was steering the greenback to victory, and although we all knew the US had to raise the debt ceiling, it didn’t seem like such a big deal. How wrong we were! The US government managed to raise the debt ceiling before the Oct 17 soft deadline, which wasn’t really a major surprise at all. To think that the US government would go into shutdown was not shocking, but to see the government default on its debt was unthinkable. Although the government pushed the deal to the brink of the deadline, the market wasn’t as shaken as dollar weakness would suggest, and seemed pretty confident an agreement would be made.

So what’s the problem? The problem is that the issue has not exactly gone away. Once the democrats and republicans agreed a deal, the dollar shot up. That was short-lived, and should rather be viewed as a little sign of relief. It didn’t take long for those losses to be reversed and it almost seemed like the US government had not come to an agreement at all. Lifting the debt ceiling till February did half the job; it removed the risk of default but only in the short term. The fact that we may have to revisit this situation again come early next year is what is troubling. The budget deal meant no default and the possibility of a future default, all at the same time.

The shutdown that lasted 16 days is likely to have hampered growth in the US, which has consequences for the Federal Reserve. The health of the US economy has been clouded by the partial shutdown, and so the central bank may need to wait until next year to warrant a reduction in stimulus. Considering this has been the backbone of dollar strength this year, the odds are no longer in the greenback’s favour. The days where strong non-farm payrolls could easily encourage a stronger dollar may have faded for now. Economic fundamentals need to produce some stellar results to see a bounce in dollar momentum, and reignite the tapering debate that has backed the strong dollar performance we saw some months back.

Sasha Nugent

Currency Analyst

Caxton FX

Caxton FX Weekly Report: Sterling rebounds while dollar remains weak

Sterling gets back on its feet
The pound looks to be stabilising after some weeks under pressure against most of its currency pairs. Demand for the euro remains fairly robust and will continue to trouble sterling as the pound attempts to push the GBPEUR rate back to levels we witnessed in September. Above-expected retail sales helped sterling to start the week in a solid position, however US and eurozone data will not make it easy for the pound to remain in control. CBI industrial order expectations and the Prelim GDP readings should do enough to keep the currency competitive. The BoE monetary policy minutes will be of interest, especially after MPC member Broadbent said the BoE has room to raise rates before borrowers get into great difficulties. Although Broadbent did stress that rates would only rise once the economy is in good health, any sign of slightly hawkish rhetoric in the monetary policy minutes will definitely be something to look out for.

A strong euro has room to get stronger
What could be regarded as an overvalued euro still has room to push further, especially against the dollar which has already seen the wrath of many other currencies. With EURUSD at levels above 1.3650, solid eurozone PMI data due late this week could definitely encourage the rate to move closer or even breach 1.37. There is, however, enough resistance at this level and with some delayed US fundamental data releases, we could see the euro need to put in a bit more work if 1.37 is to be reached.

It is not as clear cut against sterling, which is making a decent rebound from the weakness seen earlier this month. Nevertheless, the euro still has plenty of opportunity to direct both the GBP/EUR and EUR/USD rates this week, and it will definitely be interesting to see at what level EUR/USD goes too far, triggering profit-taking and the selloff we saw against sterling a few weeks back.

The US government raise the debt ceiling but the problem hasn’t gone away
Market movements are almost as if the US government is still in partial shutdown. The dollar remains weak and the effects of a prolonged debt solution continue to weigh on the greenback. The issue now is apparently the fact the debt deal agreed last week was only a short term deal, and it won’t be long until the US is back in the same situation. The hope is that by then, the democrats and republicans would have had enough time to debate and we won’t be seeing another partial shutdown. For now, though, the markets look to be on the doubtful side, and the struggle to see dollar strength emerge looks more like a lengthy one. It looks like the dollar will remain on the back foot for this week, and with the market’s finger hovering around the sell button, solid US figures are likely to only provide the currency with a little support.

End of week forecast

GBP / EUR	1.1800
GBP / USD	1.6120
EUR / USD	1.3640
GBP / AUD	1.6700

Sasha Nugent

Currency Analyst

Caxton FX

How far can the dollar go?

For the majority of trading today we have seen the dollar regain some control as US lawmakers have come closer to agreeing a debt deal. The dollar rally has pushed the EUR/USD rate back below 1.35 despite solid eurozone figures earlier today. The pound, however, has shown what it’s made of, and although a stronger dollar prevented a higher GBP/USD rate for the majority of the session, sterling seems to be making a decent comeback. Whether this can continue once the US government agreement has been announced is a different story, but for now, sterling has shown that it isn’t going down without a fight.

Sasha Nugent

Currency Analyst

Caxton FX

Caxton FX Weekly Report: Final Countdown for the US government

Sterling weakness continues as UK data shocks market
After sterling fell victim to a sell-off recently, last week’s manufacturing production figure surprised the market and gave investors another reason to get rid of some of their sterling holdings. Hopefully this week will be a better one for the pound with some significant releases due. Inflation figures will be released on Tuesday, and employment figures on Wednesday. If inflation meets the market’s expectation of 2.6%y/y, it will further justify the central bank’s position outlined in forward guidance. Employment figures will also be
watched carefully, and although no change in the unemployment rate is expected, lower claimant count figures will point to an improving economy. The last retail sales release disappointed, and this week we should see a much better number allowing sterling to make a decent comeback, to finish the week in a better position. It is likely that the euro will put up a fight, but provided UK figures can meet expectations, we should see the familiar upward trend return.

The Euro rides on
The euro has started this week still looking fairly robust, however the days ahead are looking more challenging for the single currency. ECB President Draghi has continued to shed a negative light on the progress of the eurozone, describing the recovery as fragile and uneven. Investors, as usual, seem to be drawing their own conclusions about the eurozone recovery as demand for the single currency remains fairly strong. This week sterling has ample opportunities to reverse the euro’s gains, although figures such as German ZEW Economic Sentiment may attempt to limit sterling’s potential. A number of ECB members have highlighted the problem of subdued inflation, and although the market is expecting an LTRO as the ECB’s next move, a less-than-forecast inflation figure would suggest a rate cut cannot be ruled out.
The US government has still failed to come to an agreement to lift the debt ceiling and although this continues to weigh on the dollar, some strong US figures this week will make it more difficult for the EUR/USD rate to reach 1.36 again.

A few days left, will the dollar default or overcome?
The deadline for the US government to raise the debt ceiling is fast approaching, with only four days to go. The markets may not be too worried just yet, however if an agreement is not reached soon we could begin to see the dollar re-emerge as a safe haven currency of choice. Until investors begin to park their funds in the dollar the greenback will be looking towards US data to provide the currency with some momentum. Considering US data has some catching up to do, it would be a good week for the little US releases we have to deliver some upside surprise. Until fears of a default really hit the market dollar weakness is likely to remain, with positive data only providing some short-term relief for the greenback.

End of week forecast

GBP / EUR	1.1825
GBP / USD	1.5925
EUR / USD	1.3575
GBP / AUD	1.6920

Sasha Nugent

Currency Analyst

Caxton FX

A step into reality

Last week we witnessed a sterling sell off as investors began to pare back expectations of a rate hike earlier than the BoE outlined in forward guidance. Investors came to the reality that although the UK recovery is gaining momentum, there is definitely a long way to go and the road to recovery is going to be a bumpy one. UK manufacturing production figures released this morning showed a 1.2% decline, a figure which was a complete surprise to the market, triggering another sterling sell off. This is unlikely to alter the overall view on the UK economy but will rather inject a burst of practicality into the markets. It was almost impossible for UK data to continue to provide upside surprise and it was only a matter of time before the market adjusted.

Sasha Nugent

Currency Analyst

Caxton FX

Caxton FX Weekly Report: Investors unwind sterling long positions

Investors profit-take as rate hike speculation eases
Sterling ended the week experiencing sharp declines as investors realise they may have gotten ahead of themselves on UK optimism. Bank of England Governor Mark Carney stated that the central bank will not consider “raising rates or tightening monetary policy until we see the conditions in the economy where the economy is really growing”. This, alongside economic figures that have come in below expectations, have highlighted the fact the UK still has a long way to go before the economy is perceived as “really growing”. The Bank of England is likely to maintain their dovish bias when they meet to discuss monetary policy this week, and we expect both the base rate and asset purchase programme to remain on hold for another month. After weeks of being the frontrunner sterling begins the week in a more vulnerable position and we doubt much is going to boost the GBP/EUR and GBP/USD rate back to the highs we have seen recently. Manufacturing Production figures could provide sterling with some support, however with a more euro-focused week sterling gains will be limited for a while yet.

Stellar performance from the euro, but can it continue?
The euro definitely made a strong comeback towards the end of last week, and with a more euro-focused week the single currency could possibly extend these gains further. Sentiment has improved towards the eurozone after Italian Prime Minister Letta won the confidence vote and ECB President Draghi stressed the bank’s commitment to use all policy tools available if the recovery falters. The central bank didn’t signal any concern about the current strength of the euro but did emphasize the exchange rate’s significance to the recovery of the euro area. President Draghi is due to speak on Wednesday and Thursday and it is unlikely that rhetoric will differ much from what we heard last week. German factory orders, industrial production figures and German trade balance will all be numbers to watch, and considering the ECB doesn’t view a strong euro as a threat just yet, we doubt investors will hesitate if data provides upside surprise.

How close will we get to a US default?
The dollar has suffered the consequences of a US government clash, and it will most likely get worse before it gets better for the currency. Last week we witnessed some good US economic figures provide the currency with some relief, but with the shutdown preventing the all-important US jobs release, there is only so much US data can do. The FOMC meeting minutes on Thursday will be of some interest, however with Fed tapering talk on hold for now it is unlikely to have a big influence with the partial shutdown still in place. Last week’s unemployment claims provided upside surprise and if this week follows suit it could support dollar weakness in the short term. For now the market is just playing the waiting game, and investors are not yet convinced the US government will risk a US default. As the days left to reach a decision diminish and risk aversion increases, we may see the dollar return as the safe haven once again. We believe the dollar could remain on the back foot for most of the week and don’t expect to see the risk aversion play for a few sessions yet.

End of week forecast

GBP / EUR	1.1850
GBP / USD	1.61
EUR / USD	1.3610
GBP / AUD	1.71

Sasha Nugent

Currency Analyst

Caxton FX