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

There’s no let up for sterling after weak GDP number 

Friday’s UK GDP figure for the final quarter of 2012 came in towards the
bottom end of expectations, revealing a 0.3% contraction. Understandably,
the triple-dip headlines have been in full flow. It wasn’t all bad news for
sterling last week though; the MPC minutes indicated that the BoE is not
looking to respond to last quarter’s weak growth with more QE. However,
recent comments from incoming BoE Governor Mark Carney suggest he may
be willing to shake things up in the summer. In addition, data confirmed that
the UK labour market added to its remarkable record of making strides amid
wider domestic economic weakness.

The minutes and positive UK unemployment data gave GBP only a very brief
respite before taking another dive lower. Sterling gets a bit of a break from
bad UK news over the coming few sessions, with only UK manufacturing PMI
catching the eye on Friday morning.

The pound seems to have lost a significant amount of its safe-haven status in
the recent weeks, with the market losing confidence in the UK government’s
ability to steer us through this crisis. The loss of the UK’s triple-A credit rating
looks almost certain in the coming months. Cameron’s pledge to hold a
referendum on the UK’s EU membership in late 2017 is a concern but is
unlikely to be a major weight on GBP given that it is almost five years and a
UK general election away.

US dollar firm ahead of Fed meeting 

Putting to one side the dollar’s weakness against the euro (which itself is very
much in favour), the greenback is actually performing very well across the
board. This is clear from GBP/USD’s collapse to a 5-month low below $1.57.  
We are not expecting major changes within the US Federal Reserve’s
statement on Wednesday night. The market may be disappointed to see a
lack of improvement to the Fed’s projections on US growth and
unemployment. This is likely to keep any possible amendments to the Fed’s
QE3 operations well and truly postponed until the second half of 2013, which
may be a comfort.

Wednesday will most likely see the advance US GDP figure confirm that the
US economy slowed down drastically in the final quarter of 2012, largely due
to the damaging effects of Hurricane Sandy. A slowdown from 3.1% to 1.3%
quarterly growth is expected. As ever, it is extremely tricky to predict how the
US dollar will respond to domestic economic events; whether good data will
strengthen the dollar by bringing forward expectations of an end to QE3 or
whether it will boosts risk appetite enough to weaken the dollar.
Sentiment towards the euro remains very positive indeed; officials by and
large (including Draghi, importantly) remain content with the euro’s strength
and refuse to be involved in the ‘currency wars.’ Meanwhile growth data
from Germany has made an excellent start to the year, with business climate,
economic sentiment and PMI growth figures all fuelling euro gains.

End of week forecast
GBP / EUR 1.1630
GBP / USD  1.5650
EUR / USD 1.3500
GBP / AUD  1.4900
 
Sterling is trading down below €1.17 and we are not calling a bottom on this
pair just yet.  A move towards €1.1650 looks likely in the near-term. As noted
above, the pound continues to look vulnerable against the greenback, while
the EUR/USD looks set to make an attempt at $1.35.

Richard Driver
Currency Analyst
Caxton FX