Caxton FX Weekly Round-Up: Dollar-weakness persists

Fears of stalling US growth weigh on the dollar

The US dollar has been periodically knocked by weak US economic data in the past fortnight. Last month’s poor US jobs report has put the US economy in sharp focus and further indicators from the retail sales, consumer sentiment and manufacturing sectors have all disappointed of late. Unsurprisingly, bets have increased that the Fed will remain cautious and delay tapering off QE3 in the months ahead. This is largely behind the dollar’s poor performance of late. It should however be noted that last week’s Fed minutes were not as dovish as might have been expected. The message really was that one poor labour market report in itself has limited significance and we will have to wait to find out whether this is the start of a period of renewed labour market weakness.

Weak figures have kept the dollar hemmed in, which has allowed GBP/USD to test the $1.54 in the past week, while EUR/USD has seemingly put events in Cyprus behind it and consolidated around the $1.31 level. Higher levels for both pairs are possible in the sessions ahead.

Looking ahead to this week, it’s a fairly quiet data calendar as far as the US is concerned, which will be a relief to those long of dollars given the recent economic downtrend.

Sterling back in focus as the UK news comes thick and fast

Last week’s UK manufacturing and industrial production figure was encouraging and provided just a little more indication that we will avoid a triple dip recession when the Q1 GDP number is released on April 25. This week’s UK releases include the monthly inflation update, which we expect to remain steady at 2.8%, while we expect further evidence of slowing labour market progress on Wednesday.

There is a risk that Wednesday’s MPC minutes will reveal an extra voter in favour of QE, though on balance we expect any swing voters to wait until after next week’s UK GDP figure, particularly after last month’s encouraging UK services PMI figure. This may give sterling a bit of support in the short-term. Finally, Thursday’s UK retail sales is likely to show a bit of monthly contraction, though the market will probably take this in its stride given February’s barnstorming high street performance.

Euro to remain firm in the short-term

The single currency has enjoyed plenty of demand in April and this seems likely to continue this week. A leaked statement to be released by the G20 at the end of the week looks set to take a positive view of crisis-management in the eurozone. Tuesday’s German economic sentiment survey is also expected to remain firmly in positive territory. Other than that, Thursday’s Spanish bond auction should be noted, though pressures in this market are actually very subdued after a relatively quiet start to the month on the debt crisis front.

End of week forecast

GBP / EUR	1.1660
GBP / USD	1.5370
EUR / USD	1.3120
GBP / AUD	1.48

The recent theme of euro-strength looks set to persist for the time being. This is largely because the dollar is unlikely to turn the corner over the next few sessions, though we haven’t abandoned our positive long-term view of the US dollar by any means. Sterling is likely to trade somewhere in between these two currencies, probably testing the upside against the dollar, while remaining under pressure against the euro. For now, sterling trades at €1.17 and $1.53.

Richard Driver
Analyst – Caxton FX


For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.