ECB defers action most likely until the next meeting, Cable is stopped at 1.70 but remains elevated.

UK – The United Kingdom performed well over the last week, as Services PMI came in positively on Tuesday, the Bank of England kept the Asset Purchase Facility and the Official Bank Rate the same on Thursday, and Manufacturing Production m/m came in positively on Friday. The positive economic outlook has supported the pound against most currencies in the last week or so, but depending on the data this week, we could see further gains. The relevant data this week will be Mark Carney holding a press conference on Wednesday, followed by a Bank of England Inflation Report. This will provide the BoE’s projection for economic growth and inflation over the next 2 years. Aside from this data, there will not be any major data releases, so the strength of the pound will largely be determined by market trends and speculation until the press conference on Wednesday.

EUR – The European Central bank decided to keep rates on hold for the moment, which provided a momentary spike of strength for the Euro, until Mario Draghi made a comment at the end of the press conference which strongly hinted at ECB action at its June meeting. His comment was that “the governing council is comfortable with acting next time”. This helped to restore confidence in Draghi’s pledge from June 2012 to do “whatever it takes” to save the Eurozone. However, this undermined the value of the Euro, which dropped around a percent against the Pound and the Dollar. The Euro has started the week out on the back foot, and with little data on the week to change this momentum against the Euro, we could see further losses. The only high-impact event coming out of the Eurozone this week will include German ZEW Economic Sentiment on Tuesday. Aside from this, we expect the rate this week to be driven very much by market sentiment.

USD – In the past week, the dollar index has made a significant gain of around one percent due to some positive data over the last week. There has been a reversal of the downward trend of dollar devaluation since the middle of April, as short positions are beginning to unwind and market sentiment is helping to reverse the losses that the dollar suffered. Data from the US this week could help to support the dollar, as it is forecast to come in more positively. The data will start with Core Retail Sales m/m and Retail Sales m/m on Tuesday, PPI m/m on Wednesday, Core CPI m/m, Unemployment Claims, and the Philly Fed manufacturing Index on Thursday, and finally, Building Permits data and Preliminary University of Michigan Consumer Sentiment data on Friday. With this busy week of US data, we could see the dollar go either way, but the dollar is on the front foot for now.

AUD – The Australian dollar gained against sterling and most other currencies last week, as there was much action from the Australian Central bank. The market has speculated that the RBA will soon cut interest rates, but the central bank kept interest rates at 2.50% at the last meeting, lending strength to the AUD. The Unemployment rate also dropped last Thursday in Australia, and the Monetary Policy report came out suggesting a more hawkish tone than expected, that indicators of the economic outlook are “consistent with the pace of growth”. This was a big week for the Australian dollar and it comes into this week with momentum in its favour.

End of week forecast:

GBP/EUR – 1.2275

GBP/USD – 1.68

EUR/USD – 1.37

GBP/AUD – 1.7980

Nicholas Ebisch

Corporate Account Manager

Caxton FX

Weekly Analysis - Sterling holds strong, Euro proves resilient, but the US and Australian Dollars fall. This week will be heavy with US and UK data and should be relatively volatile. Sterling has the momentum, but positive US data could well reverse those gains.

GBP – In the UK, The last week brought relatively good news for the pound. The Bank of England meeting minutes revealed a positive revised growth estimate for the UK on Wednesday, and Retail Sales m/m figures on Friday beat estimates with at least a small sign of growth. The pound has held up against most other currencies and has the momentum to push higher next week. Data to watch for this week from the UK will be the Prelim GDP q/q on Tuesday, Manufacturing PMI on Thursday, and Construction PMI on Friday.

EUR – In the Eurozone, Manufacturing data from last week and an improved PMI figure confirmed that business activity has increased overall. However, with inflation at such low levels, the Eurozone is increasingly concerned with a stronger Euro, which would further destabilize growth. Data is limited this week, but with a CPI Flash Estimate y/y figure on Wednesday, there will be a more complete picture of how prices have increased when compared to economic growth in the region.

USD – Last week, the Dollar provided some resistance to the advancing pound and Euro with positive durable goods orders last Thursday, but much will depend on the preliminary US GDP figure this coming week. This week, the all-important day will be Wednesday, as markets prepare to digest the ADP Non-Farm Employment Change, Advance GDP q/q data on Wednesday out of the US, and the FOMC will make a statement at 7pm GMT. The FOMC is also scheduled to reduce its bond buying by another $10 billion down to $45 billion this week, and with a relatively stable market, it will be easy for the Fed to proceed with this. Also, let’s not forget Thursday, as Janet Yellen will be speaking at a policy summit meeting in Washington D.C.

Canada – Canadian data will also be heavy this week, as the loonie has proved that it has had some forward momentum with positive Core Retail Sales m/m last week. BOC Governor Poloz is speaking this week on Tuesday and Wednesday will bring Canadian GDP m/m figures. The Bank of Canada has been under increasing pressure to lower their benchmark interest rate of 1% since growth has been slower than expected in the past year and the Canadian Dollar has been sliding as a result. 

Australia – Last week, the Australian Dollar was weakened significantly when Australian CPI q/q and the HSBC Flash Manufacturing PMI both came in negatively and undermined the AUD. This week, we could see a similar phenomenon, as there will be CNY Manufacturing PMI on Thursday, expected to improve marginally from a month ago. Also, there will be Australian PPI q/q expected to improve from the last quarter. The Australian dollar has been strengthening from its 2013 devaluation slide, but it seems to have stalled with poor Australian and Chinese data. This week will be an additional focal point to determine the direction of this rate.

End of week forecast

GBP/EUR – 1.2200

GBP/USD – 1.6900

EUR/USD – 1.3930

GBP/AUD – 1.8200

Nicholas Ebisch

Corporate Account Manager

Caxton FX

Carney gasps for air

So it seems that this week Governor Carney has been pushed into a corner. With UK data flying high for the majority of this week and the UK recovery appearing more balanced, it is no surprise that this week the GBPEUR rate finally breached €1.18. Yesterday the BoE kept rates on hold at 0.50% (no surprise there), and didn’t make any accompanying statement. This may have been a wise call considering the market took everything it wanted from Governor Carney’s speech last week. However, “no comment” has repercussions, and yesterday we witnessed this as UK 10yr debt spiked to a two year high, above the 3% mark. Disappointing industrial production data and the awful trade deficit figure has managed to provide a little justification for the BoE’s stance. If next week’s employment data shows improvement in labour figures, then the pressure on Carney may rise again. After all, the market can’t really expect perfect data. Time is ticking on the policy front and although current policy may be warranted, the market still doesn’t seem too convinced.

Sasha Nugent

Currency Analyst

Caxton FX

April 2013 Outlook: Sterling edges higher as debt crisis resurfaces

After an awful start to the year, sterling has benefited from a welcome boost on the exchange rates in recent weeks. A couple of positive domestic economic developments have helped matters but events in the eurozone have been the key driver, helping to put the UK’s troubles in perspective. Domestic growth data in March did little to significantly improve the outlook for the UK recovery, though a couple of bright spots have provided a much-needed source of hope. There has also been a lack of further dovish leanings within the Bank of England, though we do expect more QE to be announced in May.

There was a collective sigh of relief that Cyprus avoided an unprecedented euro-exit and more

importantly that the eurozone banking system avoided the shockwaves which would inevitably follow. Nonetheless, events in Cyprus have understandably shaken the euro in the past month. The bailout deal that Cyprus reached with the Troika will leave the country deep in recession for a long time to come but this won’t be the market’s primary concern. Alarm bells are ringing following mixed rhetoric from within the EU leadership over whether the “bail-in” – where private investors and depositors, not taxpayers footed the bill for the refinancing – represents a special case or not. Some dangerous precedents have been set and with other larger eurozone strugglers such as Portugal and Italy exhibiting some tell-tale signs of crisis further down the line, the euro could be set for a troublesome few months.

GBP/EUR

Cyprus has investors fleeing for safety

Sterling looks to have bottomed out against the euro for the time being. The wave of anti-sterling sentiment has abated for now, amid a feeling that most of the bad news is already out in the open with respect to the UK economy. If the last few weeks have taught us anything, it’s surely that all the bad news is certainly not out in the open with respect to the eurozone.                      

                            

The pound emerged from the Annual Budget more or less unscathed, despite Osborne revealing that the Office of Budget Responsibility has slashed its 2013 GDP expectations from 1.2% to just 0.6% (which will most likely be undershot). Osborne effectively passed the buck to the Bank of England in terms of efforts to stimulate UK growth, directly expanding its mandate to that effect.

The latest from the Bank of England is that Mervyn King and his two fellow doves (Fisher and Miles) remain in the minority on the key quantitative easing debate, with the other six members seemingly too concerned with rising UK price pressures. In addition, the March MPC minutes revealed that there were fears surrounding an “unwarranted deprecation in the value of the pound,” which will concern many of those betting against the pound. We feel safe predicting that there will be no dovish majority in favour of QE in this Thursday’s MPC meeting, though we see a probability that we will see the voting swing in favour in May.

UK Q1 GDP figure comes into focus

Growth in the UK clearly remains very weak indeed. February’s data revealed the worst monthly construction growth in three years, whilst manufacturing is also firmly in contraction territory. Gladly, there was some relief in that the dominant UK services sector posted its best figure in five months and February’s 2.1% retail sales growth was excellent.  However, the key issue of whether or not the UK economy will avoid a triple-dip recession, when its Q1 GDP figure is announced on April 25, remains finely balanced. The March PMI figures released over the coming sessions will be highly significant; this morning’s manufacturing update got things off to a weak start but as ever, the pressure will be on Thursday’s services figure to deliver again.

Dangerous precedents will hurt the euro

While, there have been some rare sources of positivity with respect to domestic developments, this pair’s recent climb is explained mostly by events in the eurozone. Cyprus stole the headlines; the dreaded euro-exit has been avoided once again but the market has been left with some rather uncomfortable lessons. In a fundamental shift in eurozone banking relations, private individuals and companies with large amounts of cash in European banks now find themselves at risk of other potential ‘bail-ins’ in other struggling nations. This new credit risk is likely to leave a major psychological mark on euro-depositors and will have many heading to the exits and targeting perceived safer options like the GBP and USD.

Where will the next debt crisis hotspot be? Italy is looking a decent bet. Political instability is not the only issue the country faces, economic contraction remains a major issue and perhaps more pressingly, the health of Italian banks is deteriorating at an alarming rate. If things continue at this rate then Italy could find itself in a similar position to Cyprus, in need of recapitalising its banks, with Germany opposing a fix-all bailout from the European Stability Mechanism.

Some dangerous precedents have been set in Cyprus in terms of depositors being forced into a ‘bail-in,’ senior bondholder suffering haircuts, major and extended capital controls being implemented, the ECB imposing strict deadlines on their liquidity provision. Lines in the sand have been drawn, which are fundamentally likely to undermine confidence in the euro.

Debt crisis to one side, eurozone data has remained disappointingly true to its downtrend.  Monthly growth data from Spain, France, Germany and the eurozone as a whole has all undershot expectations, which suggests that Draghi is being more than a little overoptimistic with respect to his expectations that the region’s recession will stabilise soon. Naturally, events in Cyprus have hurt confidence and sentiment gauges.

Sterling has recently posted seven-week highs of €1.1890, although this pair currently trades over a cent off this level. We do see GBP/EUR recovering further in the weeks ahead, particularly if the BoE delays QE this month and the UK services figure is solid. Asian reserve managers already appear to be responding to eurozone developments by taking a step back from the euro. We see this trend continuing, which could take this rate as high as €1.20 in the weeks ahead.

GBP/USD

Sterling finally enjoys a bounce

There is no doubt that sterling’s safe-haven status has waned in recent months, in line with the loss of the UK’s AA credit rating. It has therefore been no surprise to see the USD benefit from the lion’s share of safe-haven currency flows stemming from increased tensions in the eurozone. Nonetheless, the pound has managed to eke out some gains in the past three weeks or so, despite the uptrend in US economic figures.

Those economic figures have revealed a particularly strong increase in US retail sales and industrial production. However, with housing market data mixed and consumer sentiment gauges indicating some weakness, there remains more than enough cause for concern to see the Fed continuing with QE3 for the time being. Indeed, the Fed recently downgraded its 2013 GDP projections in anticipation of a fiscal drag later this year.

More improvements in US labour market

As ever analysis from inside the Fed and therefore throughout the market, will focus on the US labour market, from which the news has been distinctly positive over the past few weeks. The US unemployment rate dipped back down to 7.7% in February- its lowest level since February 2009, while the headline figure revealed 236,000 jobs were added to the payrolls – the biggest monthly increase in a year. There is plenty here to fuel the Fed hawks’ calls for scaling back QE3 but the bottom line is that Bernanke and his fellow doves still require further progress. They may well get what they want as this Friday’s key US labour market update once again promises to be robust.

There were some notable phrases within the Fed’s March statement, among which was the emphasis that the central bank has the ability to vary the pace of QE3 in response to changes in the US economic outlook. So it really does seem as if they are gearing us up for fazing QE3 out, though this remains conditional to labour market progress.

Sterling may well face some short-term weakness if the UK services figure disappoints and there is room here for a move down to $1.5050. However, our baseline scenario is for a further upward correction for this pair. A move up towards $1.55 is possible in the weeks ahead, though this comes with the caveat that the UK must avoid a triple-tip recession (no sure thing). Beyond this near-term upward correction, we maintain a negative outlook for this pair in H2 2013, in line with our positive outlook for the US dollar.

GBP/EUR: €1.20

GBP/USD: $1.53

EUR/USD: $1.27

Richard Driver
Analyst – Caxton FX

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Bumper UK retail sales data provides some hope for sterling

Data this morning revealed that UK retail sales grew by a whopping 2.1% in February, which is an excellent result, particularly given the dire economic figures that have surfaced over Q1. This is the biggest monthly increase in three full years. Clearly plenty of this can be attributed to a natural recovery from a fairly empty high street in January as a result of the snowy weather. However, the strong showing can’t be entirely attributed to a bounce back and driving the growth in particular was strong demand for computer tablets, sporting goods and jewellery.

We can expect an overall improvement in UK retail sales over Q1 as a whole, which should enable the UK to avoid the dreaded triple-dip recession when the GDP data is released on April 25. In turn, this may well ensure that Mervyn King, Paul Fisher and David Miles remain the three doves voting in favour of QE at next month’s MPC meeting. That certainly doesn’t mean more won’t be convinced by May, which is an important Inflation Report month.

Yesterday’s UK Annual Budget provided a little bit of help for UK households in the form of a scrapped increase in fuel duty. However, real wages are still on a downtrend and UK inflation has also ticked higher lately, so we can be pretty confident that this morning’s UK retail sales won’t be replicated any time soon. Still though, good news is good news and sterling has benefited from it today. GBP/EUR is trading at €1.1750, only marginally lower than its highest level since Feb 10. Against the US dollar, sterling is trading close to the top of its one-month trading range, having just edged half a cent lower from $1.52.  

Richard Driver

Currency Analyst

Caxton FX

February Currency Outlook: GBP, USD, EUR

February 2013 Corporate Report:  Sterling friendless

January was another rough month for the pound, against almost every major currency, and the coming weeks do not look likely to be particularly fertile for a recovery. Sterling has been among the poorest performing currencies in the market, with a wide range of concerns over the UK economy weighing heavily. There are risks of a triple-dip UK recession, which in turn raise the probability of further quantitative easing from the Bank of England and a loss of the UK’s AAA credit rating. Until UK growth shows some signs of a recovery, the pound is likely to remain under pressure.

The euro’s remarkable rally continued in January, helped by further market calm in the eurozone and subsequent improvements to global market sentiment. ECB President Draghi gave the euro plenty of support by quashing speculation that his central bank would opt to cut interest rates (watch out tomorrow for further rhetoric). This optimistic approach has actually been bolstered by significant improvements to German economic data, even if growth in Italy, Spain and France remains very weak indeed. It only takes one look at bond yields in Italy and Spain to realise that nerves towards the debt crisis are at a low ebb and that confidence is pretty stable. That said, the past week has seen tensions rise ahead of Italy’s election this month.

Other than against the euro, the US dollar is also in pretty good shape. However, the recent weak US GDP figure for Q4 2012 hasn’t done the greenback any favours and will play into the hands of Ben Bernanke and the other dovish leaning policymakers within the US Federal Reserve. Positive sentiment towards the euro looks likely to limit the dollar’s gains in the coming weeks, but we still expect the USD to have a strong 2013.

GBP/EUR

Triple-dip fears dog the pound

Sterling is hugely out of favour at present; depreciation was so drastic in January that sterling’s trade-weighted index dropped by the most since February 2010. Economic weakness, speculation of more UK monetary easing and a more general loss of faith in the GBP as a safe-haven are all issues which have weighed heavily. The warnings as to a UK debt downgrade have been understandable and whilst predicting the timing of a downgrade is tricky, it would surprise us if the move was delayed beyond June.

Does sterling really deserve the battering it has received? Well, it certainly deserved some punishment; negative growth and a lack of progress on the UK’s debt situation are always issues likely to make themselves felt on the exchange rates.

There remain some brighter spots within the UK economy; the Funding for Lending Scheme appears to be bearing some fruit - bank lending is on an uptrend. The UK labour market continues to defy the wider domestic downturn. However, these rare good news stories have been of little use to sterling, with investors questioning how positive these factors can really be if they are not resulting in any genuine economic growth.

Unfortunately it’s quite clear that it will not be a particularly robust start to 2013, thanks to January’s snowy weather. The truth is that last summer’s Olympics concealed very weak underlying growth, which will become even more apparent over the rest of Q1. Sterling has at least been granted the relief that the UK services sector returned to growth in January but the risks of a triple-dip recession are still finely balanced.

Despite weak growth, we do not expect the Bank of England to opt for another dose of quantitative easing at its February meeting on Thursday, with most members satisfied with the Funding for Lending Scheme as an alternative to QE. David Miles is likely to remain the only voter in favour of QE in the February 7^th meeting; we expect the MPC under Sir Mervyn King to continue opting against further easing.

What will be more interesting on February 7^th will be Mark Carney’s appearance in front of the Treasury Select Committee. The market will be watching very closely for clues as to how Carney, who will take over from King as BoE Governor on July 1^st, will approach monetary policy. Unlike King’s comparatively hawkish doubts over the efficacy of more QE, Carney has been vocal on the utility of further easing and has pointed to other “unconventional instruments” which suggests he will strike a more dovish tone on Thursday. This is unlikely to be good news for the pound.

Germany perks up to help the euro

Once again, it’s been fairly quiet on the eurozone front, which has been a major factor behind the ongoing gains being made by the euro across the board. The weak investor sentiment towards the eurozone that characterised so much of 2012 is being unwound, as the risks of a eurozone break-up recede.

German data has been particularly encouraging in recent weeks with forward-looking sentiment and confidence surveys hitting multi-month highs. Still, the PMIs out of the eurozone as a whole continue to point to further economic contraction, which should lead to euro-weakness later on in the year. However, at present the market appears content to overlook awful growth and celebrate the signs that the worst of the debt crisis is behind us. This is really why GBP/EUR’s decline has been so aggressive.

There is evidence of burgeoning political tensions in the eurozone. Italy’s elections are scheduled for February 24-25 and considerable uncertainty lingers with respect to the outcome, particularly with the latest polls suggesting that Berlusconi is closing the gap. In addition, there is scope for Berlusconi’s PdL party to block the governing coalition’s laws in the upper house. Elsewhere, there are calls for Spanish PM Rajoy to resign after having been embroiled in a corruption scandal. This could potentially derail Spain’s reform programme and damage the stability we have seen in peripheral bond yields.

On the monetary policy front, ECB President Draghi has been very helpful to the euro, sending strong signals that he will not elect to cut interest rates once again, regardless of weak eurozone growth and record-high unemployment. Also propping up the euro has been Draghi’s refusal to express concern at the euro’s impressive rally to 15-month highs against the pound and US dollar. Euro bears will be watching this Thursday’s press conference very Draghi closely for signs that he is uncomfortable with the euro at current levels. We suspect they may be disappointed.

Sterling has depreciated by around 6.0% from where it started the year (marginally above €1.23). Amid the ongoing anti-sterling sentiment that is still simmering away, we don’t expect that this pair’s trough of €1.1470 will be as low as it goes. If Draghi sounds in confident mood on Thursday, we’d expect the downside to be tested once again in the coming weeks, with significant risks of a move down to €1.1364 (88p). However, we do expect this pair to bottom out soon and remain confident of a sterling recovery thereafter.

GBP/USD

Dollar flexes its muscles despite stalling US growth

The news out of the US economy has been typically mixed over recent weeks and there was no real change in stance from Ben Bernanke and the US Federal Reserve as a result. The fourth quarter US GDP figure for 2012 actually confirmed a surprise 0.1% contraction, rather than the modest 1.1% growth that was expected. In addition, the US unemployment rate jumped back up to 7.9%, which considering Bernanke’s obsession with bringing the jobless rate right down before ending QE3, was not good news for the US dollar.

The market has been correct not to panic at the US economy’s weakness at the end of last year, much of which can be put down to the effects of Hurricane Sandy. The Fed was clear that it was a case of growth pausing as opposed to it representing the beginning of another dip back into recession.

The GBP/USD pair’s sharp decline in the year to date has finally started to reflect the contrasting conditions and outlooks for the UK and US economies. Whilst the US has suffered some temporary weakness, 

underlying growth is still in decent shape and this will continue to be the case in 2013. The UK, by contrast, did not grow in 2012 and will struggle to eke out much growth in 2013.

An interesting theme over recent weeks has been the US dollar’s strong performance against currencies like the GBP, despite its extreme weakness against the EUR (EUR/USD climbed to a 15-month high only last week). We are already seeing concerns over the political situation in Spain and Italy spark doubts over how much higher EUR/USD can go. If we see the downward correction in EUR/USD that we continue to expect, then we expect GBP/USD to suffer as a result. Sterling is struggling with weak domestic news as it is, without major euro-dollar flows adding further pressure. This may well be delayed until later on in the year but it would be no real surprise if it came sooner. 

We may see GBP make another attempt above the $1.57 level in February but we expect that would represent an attractive level at which to sell. This should signal another move lower and potentially take this pair to fresh 6-month lows below the recently hit $1.5650 level.

GBP/EUR: €1.14

GBP/USD: $1.55

EUR/USD: $1.3650

January Outlook: GBP/EUR/USD

The end of 2012 was characterised by euro strength and dollar weakness, with sterling’s performance falling somewhere in between. We have seen GBP/USD rally to fresh highs lately, while GBP/EUR has posted new multi-month lows. Whilst our central scenario is that we will see these two trends reversed over the course of 2013, we note significant short-term risks to sterling vis-à-vis the euro. A weak UK GDP figure for Q4 2012 or a loss of the UK’s AAA credit rating are likely to keep GBP/EUR below €1.25 in the coming weeks, which is significantly below where we see it trading by this time next year.

GBP/EUR

Sterling suffering from UK triple-dip fears

December’s growth data pointed to a disappointing slowdown in November, with the UK’s key services sector only narrowly avoiding a monthly contraction. We have been warned in no uncertain terms by the Bank of England that the UK economy could well have contracted in Q4 2012. The available figures do indeed point to this, even if it is likely to be only marginal. Still, talk of a triple-dip recession is hardly going to foster a mood of confidence towards the UK recovery.

Looking ahead, the near-term outlook for UK growth is likely to be flat, as the economy wrestles with ongoing weakness in demand from the eurozone. We are simply not seeing the rise in UK exports that is necessary and with the eurozone poised to continue contracting throughout the first half of this year, this problem is unlikely to be addressed.

Chancellor George Osborne’s Autumn Statement, delivered in December, told us that the UK government is sticking to its guns on fiscal consolidation, which is likely to continue constraining growth, though we agree that this approach is essential. However, weak growth in combination with Osborne’s failure to make progress on bringing down the country’s soaring debt levels are likely to convince at least one of the major credit rating agencies to downgrade the UK’s triple-A rating. This is a risk for sterling, though we are among those who are sceptical about just how much this would hurt the pound.

In terms of BoE monetary policy, we still only have one MPC member (David Miles) voting in favour of more quantitative easing. The vast majority of the voters appear content to allow the effects of the Funding for Lending scheme to continue feeding through and unless we see evidence of further significant economic weakness, we don’t expect any more QE until at least the second half of 2013. As such, this month’s BoE meeting should yield no major developments, though the release of the MPC minutes on Jan 23 will be as closely watched as ever.

Euro strong but fundamentals point to a decline

As far as the euro is concerned, we have to admit that we are surprised to report GBP/EUR’s recent decline to an eight-month low below €1.2150. Supporting the euro is the fact that Greece is out of the woods for the time being and eurozone tensions have eased accordingly. The key driver of the euro’s resilience, as ever, is the perpetual diversification of USD into EUR by Middle and Far Eastern central banks. 

Nonetheless, we continue to foresee a euro decline through 2013, led by declining economic fundamentals and ongoing eurozone risks. It goes without saying that a weaker euro would benefit the eurozone economy. However, using rhetoric to this effect was a rather dicey move for EU officials last year, amid concerns over the very existence of the euro. We should see greater opportunity for policymakers to take advantage of calmer markets and talk up the merits of a weaker euro this year, without highlighting any existential crisis on the part of the single currency.

In terms of what to look out for this year, elections in Germany and Italy stand out as risk events, as does the likelihood of a Spanish sovereign bailout request sooner rather than later. Fortunately for the euro, Germany doesn’t go to the polls for another nine months, while Greece will likely stay out of the headlines for time being. Longer-term, we do expect the eurozone’s problem child to continue missing its targets, whilst there is also a risk of a breakdown of the Greek coalition.

Political uncertainty in Italy poses one of the most significant risks to the euro in the short-term; elections are likely to be held in March. This should put Spanish bond yields under pressure, as would a Moody’s downgrade of Spanish debt to junk status, which is looking probable based on comments made by the rating agency last October.

Sterling has bounced off its multi-month lows in the €1.2150 region and is currently trading around €1.2350. We expect this pair to remain fairly stable around this level in January, before edging back up towards €1.25 in the coming months.

GBP/USD

US steps away from the fiscal cliff

2013 has kicked off with a bang thanks to the rather predictable eleventh hour deal to avoid the US fiscal cliff. The absence of such a deal would have seen highly damaging tax rises and spending cuts coming into the force on January 1. The US Congress has taken a leaf out of the eurozone’s book by effectively kicking the can down the road but fiscal tightening will nevertheless be a major feature of the US economy this year. The Congressional Budget Office is expecting the US economy to grow by around 2.0% in 2013, which factors in a 1.4% reduction due to spending cuts.

The fact is that nothing of any real substance has yet been decided on American fiscal reform. The next two months will be the subject of further fierce negotiations on what cuts are made and where. The dysfunction of the US political system over recent years almost guarantees a further headline grabbing crisis in the coming months. Indeed, Moody’s and Standard & Poor’s have ramped up the pressure by branding this week’s deal “insufficient.”

Where does this all leave the GBP/USD pair? Well, the dollar has performed remarkably poorly in recent weeks and sterling actually mustered the strength to rally to an impressive fifteen-month high of $1.6380 in early New Year trading. However, the dollar is showing some initial signs of a rebound with this pair having retreated by over two cents from the aforementioned high.

Buying USD above $1.60 remains attractive

Put simply, we have seen any level above $1.60 as a strong opportunity to buy USD for a while now, so current levels of $1.6150 still look highly attractive. We have to admit that this pair finished 2012 significantly higher than we expected, but we remain confident that the greenback will find its feet in 2013. Behind this is a belief that economic fundamentals will acquire a greater share of market focus this year. With the US economy easily outpacing its US and UK counterparts, even after the effects of fiscal consolidation are factored in; increased focus on economic performance should benefit the greenback. In the short-term though, January should provide some more shelf-life for this pair above $1.60.

One month direction:

GBP/EUR: €1.2375

GBP/USD: $1.61

EUR/USD: $1.30

Richard Driver

Currency Analyst

Caxton FX

Caxton FX Currency Round-Up: GBP/EUR, GBP/USD

Euro under pressure as ECB indicates cut to deposit interest rates 

The euro has been hit by a few different factors in the past few sessions. ECB President Draghi gave the single currency a knock last Thursday by revealing that whilst there would be no change to the Bank’s policy this month, we might expect some monetary easing next year. From Draghi’s comments, we no longer draw the conclusion that the ECB will cut the headline interest rate in Q1 next year. However, there were real indications that if growth disappoints and eurozone nerves spike in the coming months, we could see a cut to the deposit rate in a bid to encourage banks to step up lending.

Both the ECB and the German central bank (the Bundesbank) have delivered some fairly gloomy growth predictions in the past week. The former now sees the eurozone economy contracting by 0.3% next year, after previously predicting growth of 0.5%. Meanwhile, the Bundesbank disappointingly slashed its forecasts for German growth next year; reducing its June forecast of 1.6% growth to 0.4%.

We have had some good news today on the German front however, with a key economic sentiment survey hitting a seven month high. The latest sentiment and confidence surveys out of Germany suggest the country may narrowly avoid a recession, though a contraction in Q4 2012 looks highly likely. The German economy may not be in as weak as many had expected but the hopes for the rest of the eurozone are rather dimmer. This could well be highlighted by Friday morning’s eurozone PMI growth figures.

Italy hits the headlines as PM Monti announces resignation plans

Technocratic Italian PM Mario Monti dropped a bomb over the weekend by announcing his intention to resign once the Italian parliament has passed its 2013 budget. Berlusconi is waiting in the wings but his approval ratings suggest this is too big a mountain for even him to climb. Nonetheless, this political uncertainty - which raises serious question marks over Italy’s ability to deliver the necessary cuts and economic reforms to keep bond yields stable - could weigh on the euro significantly in the coming weeks and months.

All eyes on US Federal Reserve QE decision

Last week’s surprisingly strong figures from the US labour market are unlikely to satisfy the US Federal Reserve at its meeting over the next two days. We expect the Fed to decide to replace Operation Twist (which is set to be concluded) with a further $40bn in asset purchases, to bring its QE programme up to $80bn per month. There are various tweaks that the Fed can make to its monetary policy, to which the US dollar will respond differently. Given that sterling is trading at a very healthy rate of $1.61 at present, we would urge dollar-buyers to act now.  

End of week forecast

GBP / EUR	1.2450
GBP / USD	1.60
EUR / USD	1.29
GBP / AUD	1.53

Sterling has enjoyed a welcome little recovery against the euro amid some rather negative eurozone developments. At €1.24, we have not abandoned hopes of one last push for €1.25 before the end of the year. There is not much to get excited about with respect to sterling at present but we do expect enthusiasm towards the euro to wane from here. A move below €1.23 is looking increasingly unlikely.

Richard Driver
Currency Analyst 
Caxton FX

December Monthly Report: GBP/EUR, GBP/USD

Greece drives euro rally but US fiscal cliff looms

Sterling was broadly unchanged across the exchange rates through November, except unfortunately (depending on your exposure, of course) against the single currency, where a significant decline was seen. We have seen some progress from the eurozone in recent weeks, from Greece in particular. A deal was struck to put the country’s debt on a more sustainable path, one that could give it a realistic chance of emerging out of the current crisis, though this is clearly many years away. Most importantly, the risk of a Greek exit and euro break-up has receded – the key factor behind the euro’s latest rally.

There has been something of a dark cloud hanging over the pound in recent weeks, caused by a mixture of negative UK data and pessimistic growth forecasts from the Bank of England. This in turn filtered into speculation that the UK could lose its AAA credit rating before long.

These factors haven’t stopped the pound from sustaining some very respectable levels against the US dollar however. There has been a marked improvement in growth data from the likes of the US, China and even the eurozone in recent weeks, which in combination with progress in Greece has lifted investor sentiment from a mid-November slump. However, with little progress being made on the US fiscal cliff issue, the dollar could well bounce back before the end of the year.

GBP/EUR

Sterling weak but downside limited despite weak UK data

It has been a difficult few weeks for this pair. The Bank of England brought the market crashing back down to earth with some pessimistic growth projections in the aftermath of the surprisingly strong Q3 UK GDP number (1.0%). Sir Mervyn King & Co have been very deliberate in managing our expectations with respect to the UK economy’s performance in the final quarter of the year, highlighting in the Quarterly Inflation Report that there are significant risks of another contraction.

November’s UK figures certainly didn’t point to a very robust start to Q4, with UK manufacturing sector growth contracting and the services sector giving its worst showing in almost two years. We also saw the worst UK claimant count update in over a year (after a very good few months it must be said).

The recent public sector net borrowing figure came in worse than expected thanks to tax revenues continuing to fall short, which painted a grim picture of George Osborne’s deficit-reduction plan. With Moody’s Investor Service having recently cut France’s AAA credit rating, many in the City are speculating that UK debt will be dealt the same hand before long. There is a high risk that one of the big rating agencies will swing their axe in the UK’s direction in the coming months and this has left its mark on sterling.

It hasn’t been all bad news as far as the pound is concerned. UK inflation ticked higher to 2.7% from 2.3%, which may have discouraged one or two MPC members voting for QE in their November meeting. The minutes from that meeting revealed that in fact only one voter, David Miles, was in favour of extending the BoE’s quantitative easing programme. On balance, we do not expect any further QE from the BoE, which should be supportive of the pound in the longer-term. However, persistently weak UK growth is likely to continue fuelling QE speculation. In addition, the MPC minutes appeared to remove the option of an interest rate cut for the “foreseeable future.”

Greek disaster avoided

 From the eurozone, November was very much Greece’s month. With a deal being struck to avoid an imminent default and bring Greek debt under some recognisable control, the market may be able to put this particular eurozone worry on the backburner to some extent. Nevertheless, there remains a high degree of scepticism towards Greece’s ability to meet its targets and towards a lack of detail within the agreement. We know that Greece will be granted longer to repay its debt and that interest rates on that debt will be lowered. However, it is unclear how the intended bond buy-back (at a discount) will be funded and when it will occur.

Spain has this week made a formal request for its crumbling bailout sector, which is a relief as far as the market is concerned. This isn’t to be confused with a sovereign bailout though and Spain will surely be the subject of the market’s cross hairs once again before long. We don’ think PM Rajoy will be able to avoid requesting a full blown bailout, given the dire state of economic growth and the still elevated borrowing costs that the country is facing (despite recent declines). Any realistic analysis of Spanish growth and debt dynamics over the coming years suggests that a bailout is inevitable.

Concerns over the wider eurozone growth issue in the eurozone have eased somewhat thanks to some recent updates. Germany and France both showed unexpected growth of 0.2% in the third quarter, while Italy contracted by half as much as expected (0.2%).  Nonetheless, we see nothing within the more forward-looking figures (despite the recent upturn in the German business climate) to suggest the eurozone can avoid a recession next year.

Sterling is trading at fairly weak levels around €1.23 at present and we are sticking to our long-term and long-held view that this pair’s upside potential outweighs its downside risks. Our hopes for a move towards €1.25 by the end of the year remain intact and, more importantly, realistic. In the short-term however, there is a strong risk of a move down towards €1.2250.

GBP/USD

Sterling soaring against soft US dollar, but for how long?

This pair’s downtrend has been interrupted in the past fortnight by developments in Greece, which have had a very uplifting effect on market conditions. The avoidance of a messy Greek default and euro-exit saw global equities rally, weakening the US dollar significantly. The $1.60 level has been recovered as a result but as ever we view sterling to be on borrowed time above this psychological threshold.

The US economy continues to show evidence of a strong finish to the year, demonstrated not least by the recent revised GDP figure for Q3, which revealed an annualised growth pace of 2.7%. Consumer confidence continues to climb and we are seeing the US housing and labour markets make further strides.

With the Greek ‘can’ kicked down the road, focus through to the end of the year is likely to be dominated by the US fiscal cliff issue. On January 1^st 2013, a series of sharp US tax rises and spending cuts are scheduled to come into being, unless negotiations between the Democrats and the Republicans bear some fruit in the coming weeks.

The fiscal cliff could as much as half US growth next year and in doing so dent the global recovery considerably; the stakes are extremely high. It is broadly for this reason that we expect US politicians to put some sort of compromise together, in the same way we expected Greek negotiations to produce a deal. Nonetheless, nervousness over this game of ‘chicken,’ which could well go right down to the wire, is likely to lead to increased demand for the safe-haven US dollar in the coming weeks.

Sterling is trading up at $1.61 level, which we view to be an excellent level at which to buy USD. In our view, sterling is highly unlikely to set fresh highs above this pair’s fifteen-month peaks in the $1.6250-1.6270 area. Sterling’s headroom is looking increasingly limited from here and we expect a move lower in the weeks ahead.  

Richard Driver

Currency Analyst

Caxton FX

Sterling rallies on BoE's "no QE" decision

The Bank of England has today decided against adding to its asset purchase facility (quantitative easing programme), which remains at £375 billion. The result has been some further support for the pound, so cleary there were some lingering suspicions that the MPC doves would do enough to persuade a majority to vote in favour of QE. The BoE base rate also remains at 0.50%, though this was universally expected.

Despite disappointing updates from the UK services and manufacturing sectors in the past week, the MPC was always likely to hold fire on the issue of further QE this month. The UK GDP figure for Q3 would have firmed up several MPC members’ positions and from the comments emanating from the committee, several members doubt not only the need for further QE but the capacity of the measure to actually make a material impact. In addition the BoE thinks that the 2.0% inflation target will be hit regardless of more QE, due to persistently high inflation.

Whether or not the BoE will decide that further QE is necessary in the coming months really depends on whether the recovery that was indicated in Q3 materialises. QE should be seen as an emergency measure and UK data has revealed a slight uptrend of late, so it really wasn’t necessary in the absence of any fresh shockwaves. If the debt crisis or the eurozone downturn drags the UK back into a triple-dip recession then there is little doubt that the BoE will once again come to the rescue. As it stands though, its case of wait and see how this recovery progresses. 

Richard Driver

Currency Analyst

Caxton FX

November Outlook: Euro set to decline

After some weak figures from the UK economy to kick October off, we have enjoyed a pretty steady flow of positive domestic news. The highlight has been the recent preliminary UK GDP figure for Q3, which indicated growth of 1.0%, almost doubling expectations. With headlines surrounding the UK economy’s emergence from recession, sterling has enjoyed some renewed interest, though with domestic growth so far this year almost completely flat, you don’t have to look far to find the sceptics.

As far as the US economy is concerned, conditions are certainly perking up. The recent advance US GDP figure for Q3 revealed annualised growth of 2.0%, so it was a case of anything the UK can do, the US can do better.  The Fed will also be encouraged by significant improvements in the US labour market. It appears that the recovery of the world’s No.1 economy from its mid-year slump, albeit later than expected, is well under way. Nonetheless, the risk of the US fiscal cliff continues to pose serious threats to US and indeed global growth in 2013.

It has been fairly quiet on the eurozone front in recent weeks. Spain remains frustratingly tight-lipped on the issue of a bailout request. However, we are heading into a crucial week in which the Greek parliament will decide whether or not to approve an austerity package that is essential to the release of the country’s next tranche of aid.

GBP/EUR

Sterling benefits as UK exits recession

Sterling spent much of October under pressure against the euro, with no major panic headlines emerging out of the debt crisis. Disappointing domestic data also kept sterling pinned well below the €1.25 level for long periods, with the services, construction and manufacturing sector updates all disappointing.

However, we have seen a decent turnaround in figures in the past fortnight or so, which has provided sterling with renewed support. The labour market continues to make impressive strides, as shown by the unexpected dip in the UK unemployment rate to a 13-month low of 7.9%, while retail sales were also in good shape in September. These figures were topped off by a 1.0% preliminary UK GDP figure, which was well above the 0.6% estimates that were prevailing in the build-up. With the data revealing that the negative growth that dominated the first half of the year has been recouped, the UK government enjoyed a rare sigh of relief.

MPC to vote against QE this month

This all leaves the Bank of England interestingly poised in terms of its next move. MPC members have been quick to warn that we can expect a much weaker growth figure from the fourth quarter, once the temporary factors of the Olympics and the bounce back from the extra Q2 Jubilee bank holiday are discounted. However, judging by the minutes from last month’s MPC meeting, not only is the MPC split on the desirability of another dose of quantitative easing, but there appears to be plenty of scepticsm with respect to the usefulness of such a move. In addition, there have been hints that the government’s Funding for Lending initiative, where bank lending is incentivised, is making a real difference.

There is plenty of reason to suspect that last quarter’s GDP figure was a temporary surge for an economy that still needs nurturing back to health. The latest updates from the services sector suggests the UK has made a soft start to Q4 but we nevertheless expect the MPC doves to fail to muster a majority vote in favour of QE this week.

Greece vote gets euro nerves jangling again

As far as the euro is concerned, focus has centred on the familiar issues of Greece, Spain and deteriorating eurozone growth. Greece will dominate the eurozone headlines this week, with PM Samaras presenting a controversial package of fresh austerity measures which will be voted on by the Greek parliament later this week. The vote will come right down to the wire, though we are expecting the package to be approved.

We are sticking to the ‘muddling through” assumption that Greece will do what is demanded of it and in turn will receive some concessions, along the lines of lower interest rates, extended loan maturities and extended austerity deadlines. The stakes are simply too high to allow the Greek saga to blow up again.

With Spanish bond yields coming away from the dangerous 7.0% mark in the aftermath of ECB President Draghi’s pledge to buy up unlimited peripheral debt, the pressure on PM Rajoy to request a bailout has eased somewhat. However, the market is likely to take an increasingly dim view of Rajoy’s ongoing procrastination through November (talk has emerged that he will wait until next year). Ratings agency Moody’s handed Spain some breathing space last month, sparing it the blow of downgrading its debt to ‘junk’ status but there is little doubt it will wield its axe once again if progress fails to emerge.

As ever, major concerns are stemming from the deteriorating state of eurozone growth, as the region is dealt round after round of austerity. Whilst the ECB now looks set to hold off from cutting interest rates until next year, declining demand from peripheral eurozone nations continues to filter into weakness in the eurozone’s core. German figures were yet again poor in October, compounding fears that the powerhouse economy is heading into recession. The region’s declining economy is really showing few bright spots, while the headlines out of the UK economy contrastingly highlight its re-emergence from recession.

Sterling is trading just below the key €1.25 (80p) level and direction from here over the coming weeks will really depend on whether the pound can make a sustained move north of this benchmark. We can’t discount another move back down towards €1.23 but we maintain expectations for this pair to move above €1.25 in the coming weeks.

GBP/USD

Dollar to benefit from upturn in US growth

Sterling has traded very positively against the USD in recent weeks but has finally suffered a downward correction in the past week. GBP/USD is still only a couple of cents off April’s multi-month highs above $1.62 with stronger UK data and diminishing risks of QE providing the pound with plenty of support at $1.60, just when a move back down to the $1.50s has looked on the cards.

The USD is attracting increased demand at present on the back of some strong US economic figures. The US unemployment rate fell to 7.8% in September, the lowest level seen in almost four years (though this bounced up to 7.9% in October). The advance US GDP figure for the third quarter came in above expectations at 2.0% (annualised), powered by a surge in consumer spending and a temporary boost from defence spending. November’s excellent employment update, suggests we can expect further improvements over Q4.

Global concerns to highlight dollar’s safe-haven status

With the fiscal cliff a month closer, so too are the risks of a massive hit to US growth. This in our view will increase appetite for the safe-haven US dollar as we approach year-end. Meanwhile, we are struggling for progress on the Spanish debt/growth problem and broader concerns with global growth should also underpin the greenback.

Whilst the US Federal Reserve is engaging in QE3, the US economy is still outpacing the UK by some distance and we believe this will soon be reflected in some dollar strength. The UK’s last GDP figure may have been impressive (1.0% in Q3) but looking at the year to date, growth has essentially flat lined and with the eurozone recession deepening, major risks to domestic growth remain.

This week’s US Presidential election makes short-term swings highly probable and highly unpredictable. Not only is it unclear how the dollar will react to whoever wins but there is also the issue of which party will control Congress. Our conservative bet is that the status quo will broadly remain, with Obama emerging victorious but with doubts remaining over his ability to strike a deal to avert the fiscal cliff. We maintain our position that that we will see this pair spend most of the rest of the year below $1.60. Sterling’s two-month low of $1.5920 should be tested soon and we believe this will ultimately be broken, paving the way for move back into the mid-$1.50s.

1-month Outlook

GBP/USD:  1.58

GBP/EUR: 1.2550

EUR/USD: 1.26

Richard Driver 

Currency Analyst

Caxton FX

Caxton FX Weekly Outlook: GBP/EUR/USD

UK GDP figure strong but reality check could be around the corner

Last week’s Q3 UK GDP figure beat expectations by some distance (1.0% vs 0.6%), which triggered plenty of sterling demand. The boost from the Olympics and the natural rebound from the extra bank holiday that weighed on growth in the second quarter suggest that the economy has recouped the 0.9% contraction that we saw in the first half of the year.

The much better than expected GDP figure is certainly good news but if we take a step back, the truth is that the UK economy has done little more than flat line in 2012 so far. Since the release, MPC members have been quick to manage our expectations for Q4. Indeed, we are likely to see some weak growth figures in the week ahead in the form of the monthly updates from the UK manufacturing and construction sectors, which threatens to knock the pound off its perch against the dollar in particular.

Despite the scepticism with which many are looking upon the GDP figure, we do see it as likely to convince the BoE not to announce another round of QE at its monthly meeting next week. Whilst there is clearly a pro-QE voice within the MPC, we just doubt that the doves will be able to form a majority next week.

US growth in better shape ahead of key monthly employment data

Friday brings October’s US non-farm payrolls figure, which is expected to show some further modest improvement. This, in combination with last week’s forecast-beating US GDP figure (which indicated that the US economy grew at an annualized pace of 2.0% in Q3) may well give global stock markets a lift, taking away some demand from the safe-haven US dollar. As things stand however, fears over Hurricane Sandy have instilled in the markets a distinctly cautious tone at the start of this week, which has kept the EUR/USD pair pinned down below $1.30.

The US dollar has certainly been on the ascendancy in the past week, as frustrations over a lack of progress in Spain and Greece have set in. The former country appears no closer to requesting a bailout, something which is clearly testing the markets’ patience by the look of rising Spanish bond yields. Also weighing on the euro last week were some very disappointing German economic figures – this weak growth story running behind the debt crisis is a key driver behind our negative outlook for the euro in the coming months. We have had some poor German employment data out this morning, which has been a source of concern, though the euro has been given a helping hand today by a positive Italian bond auction.

End of week forecast

GBP / EUR	1.2400
GBP / USD	1.5950
EUR / USD	1.2860
GBP / AUD	1.5550

Sterling is trading at €1.24 this morning and faces a difficult end to the week in the form of domestic growth data at the end of the week. We see EUR/USD paring back from its current $1.2950 level, which should help GBP/EUR fall no lower than €1.2350. We still fancy a move above €1.25 in the coming month or so, which could actually bring a move significantly higher into sight provided the BoE holds off from further QE.

GBP/USD’s rallies are running out of steam at early stages and a sustained move below $1.60 is still our best bet.

Richard Driver
Currency Analyst
Caxton FX

MPC minutes suggest dovish majority in November

This morning’s MPC minutes release and UK employment figures brought some positive news for sterling, even if this didn’t translate in to any real demand for the currency today. The MPC minutes were not as dovish as they could have been, bearing in mind September’s update from the UK services, construction and manufacturing sectors were very disappointing. Meanwhile this morning’s UK unemployment figures beat expectations considerably, providing further optimism for a positive Q3 GDP figure on October 25.

The minutes revealed that there are clearly differing views within the MPC. Whilst no members voted for more QE in October, there are very likely to be members in favour of more QE in November. However, the MPC minutes and various speeches from members like Martin Weale and others such as Broadbent and Dale, reveal that there are plenty who doubt the need and indeed the actual usefulness of more QE.

Based on these minutes, it seems unlikely that the MPC doves will be able to form a majority in favour of QE in November. Martin Weale’s reservations over whether more QE is in line with the Bank’s inflation target could well convince some of the fence-sitters to hold fire on QE, as could the early indications that the Funding for Lending Scheme is stimulating credit conditions. Next week’s UK GDP figure could well have the final say for several voters.

Today’s UK employment figures have positive implications for the upcoming GDP figure. With the jobless rate dropping unexpectedly down to 7.9%, UK unemployment is at its lowest level since June 2011. The government will take a huge amount of comfort in the ongoing uptrend we are seeing in the UK labour market.

Richard Driver,

Currency Analyst

Caxton FX

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

Standard and Poor's cuts Spanish credit rating but Rajoy still delaying 

Rating agency Standard and Poor’s cut Spain’s credit rating by another two notches last week, which puts the country’s debt only one notch above ‘junk’ status. Moody’s already has Spain at this level but when it publishes its report in a fortnight, the market response could be very negative indeed if it does in fact downgrade Spain to junk territory. Speculation that Standard and Poor's axe wielding would prompt an aid request from Spain intensified last week but the latest reports suggest that not only will Rajoy wait until after regional elections on October 21 but he will wait until November before officially requesting a bailout. More delay then, though at least we have an idea of timescales.

Interestingly though, Spain’s bailout looks set to become part of a larger package containing a bailout for Cyprus and an amended loan package for Greece. This will relieve EU officials of the requirement to repeatedly obtain approval from the eurozone’s national parliaments. In terms of the eurozone’s other key problem child, a Greek deal on a new austerity package is likely to be agreed in time for this week’s EU Summit, which should help to set market nerves at rest with respect to the next tranche of Greek aid.

In terms of eurozone data this week ,we have a key German economic sentiment gauge released on Tuesday, which looks likely to improve slightly, though probably not enough to trigger any rally for the euro.

Big week of UK announcements ahead 

Last week brought a lull in terms of UK news. We learnt UK manufacturing production underperformed in August and that the UK trade deficit widened quite dramatically, but the week ahead brings plenty of key domestic figures. UK inflation is set to take another sharp downturn, which could well embolden the more dovish members of the MPC to vote for more QE next month. The minutes from the last MPC meeting are also released on Wednesday, which may be slightly more downbeat based on September’s weak PMI growth figures. This could potentially hurt the pound if it is enough to convince investors that a few members will be swayed to vote for more QE in November.

UK labour data looks set to be solid again on Wednesday, while we should also see some better growth from the UK retail sector. The market will watch all these figures closely but one eye will be kept on next week’s (October 25) initial Q3 UK GDP estimate. This is the next major event for sterling this month.

We are expecting plenty of range-bound trading this week, with EU leaders set to put off major announcements until next month. Having failed once again ahead of $1.61, GBP/USD looks set to return to the $1.60 level. We are sticking to our guns in terms of our predictions that when this pair does finally make a sustained break away from the $1.60 level, it will be to the downside. The euro continues to look tired as it approaches the $1.30 level and a dip below $1.29 looks possible this week.

Sterling is struggling to sustain any significant gains against the euro. We expect the €1.2350 will provide plenty of support in the sessions to come, so we’d view current levels to strong ones at which to sell the euro. A break higher back up towards €1.26 isn’t out of the question this month.

End of week forecast
GBP / EUR 1.2450
GBP / USD 1.5975
EUR / USD 1.2850
GBP / AUD 1.5800

Richard Driver
Currency Analyst
Caxton FX

GBP/USD Outlook for Q4

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

Sterling struggles as UK growth runs out of steam at end of Q3

After an excellent few weeks in which UK figures repeatedly beat expectations to the upside, this week’s figure reveal that UK growth slowed up in September, which represents a disappointing conclusion to the third quarter. All three of the monthly updates from the UK manufacturing, construction and services sectors came in softer than consensus expectations, which is likely to bring the UK government firmly back down to earth.

The Chief Economist of Markit, the company which compiles the PMI data that we are talking about, has suggested today that UK GDP will only grow by 0.1% in the third quarter, which is well below our and the market’s expectations. Before this week, we were roughly in line with consensus expectations of a GDP showing of 0.6%. Clearly this week’s figures cannot be ignored but a downward revision to 0.1% is a little too drastic for us. We are still anticipating growth close to the 0.5% mark. The August Inflation Report from the BoE, which anticipated growth of as much as 1.0% in Q3, is likely to be well wide of the mark.

Although today’s services data suggests that the steady and impressive improvements we have been seeing in the UK labour market may be coming to an end, the order books are at least looking pretty healthy. Still, the figures do firmly indicate that the strength in the UK economy seen in August was down to temporary Olympics-related demand. Underlying growth appears to be significantly weaker.

Many market players will naturally respond by speculating that the Bank of England will react with another round of QE. Thursday will not produce a QE decision, though November’s BoE meeting is likely garner far more debate from within the MPC. Much will depend on the Q3 preliminary GDP reading at the end of the month.

Richard Driver

Currency Analyst

Caxton FX

October Monthly Outlook: GBP/EUR and GBP/USD

Sterling to benefit from resurgent UK economy

From the eurozone, September’s two key events were ECB President Draghi’s announcement of his long-awaited bond-buying plan and the German Constitutional Court’s decision to approve the permanent bailout fund. Since then, there has been a real lack of any further concrete developments, which has understandably frustrated many market players and caused some risk aversion. As the next major event in the timeline of the eurozone debt crisis, speculation over the imminence of a Spanish bailout request is dominating market thinking at present. PM Rajoy does not actually appear to be much closer to making a formal request; he looks likely to wait until after Spanish regional elections to be held on October 21.

From the US, we have finally seen Ben Bernanke deliver what the market has been waiting for – more support for the US economy in the form of QE3. The move was priced in to a large extent but the dollar has been unable to stage any significant recovery in the immediate aftermath of the Fed’s announcement.

Conditions here in the UK continue to look a little brighter, though understandably many investors will still need further positive evidence to be truly convinced that the economy is on a path to a sustained recovery. However, with the Japanese and US central banks engaging in QE in September and the European Central Bank also taking monetary easing measures of its own (though rather more unconventional), the market is beginning to look more favourably upon the pound again.

GBP/EUR

Spanish delays will hurt the euro

Sterling has made a decent recovery against the euro in recent weeks, after what was quite a sharp decline as a result of the optimism that followed the announcement of the ECB’s bond-buying plan. There has been a positive response to some of the UK figures that have emerged in recent weeks; trade balance data revealed a dramatic rise in exports to destinations outside the EU, suggesting UK businesses are adapting to deteriorating eurozone demand. Meanwhile, UK unemployment figures continue to defy the overall weak picture of UK economic growth by making significant strides. From retail sales data to public sector borrowing figures, the UK economy has been beating market expectations time and again and this is filtering into some sterling strength. Another positive has emerged with the latest upward revision to the UK’s Q2 GDP figure to -0.4%, considerably better than the original estimate of -0.7%. Hopes are high for a very strong showing for the Q3 UK GDP figure released on October 26.

The minutes from the MPC’S September meeting revealed a unanimous vote against further QE (for now). The decision in favour of leaving the BoE 0.5% base rate unchanged was also unanimous. The fact that one MPC policymaker saw a good case for QE in September did not go unnoticed but as things stand, the Bank of England is understandably in wait-and-see mode. In light of the increased room for domestic optimism and the easing of financial conditions in the eurozone in recent weeks, it will not come as much of a surprise to learn that we are not expecting any fresh monetary easing measures from the Bank of England this month. November is likely to see the Bank assess its options much more carefully though.

Coinciding with strong economic figures has been an increased appetite for the pound as a relative safe-haven. Gilt yields have declined in recent sessions as investors attempt to take cover from renewed uncertainties from the eurozone and as usual this has boosted the pound by association. With the QE decisions from the US Federal Reserve and the Bank of Japan in September, sterling has climbed a little higher up many investors’ wish lists in recent weeks.

Putting improved UK conditions to one side, the major factor behind GBP/EUR’s climb in the past month has been a shift in sentiment against the euro, as is predominantly the case when this pair climbs. The market relief that followed the ECB’s commitment to buy unlimited quantities of distressed peripheral debt has well and truly worn off. Investors have refocused on the major issues facing Spain and Greece in particular.

PM Rajoy has thus far snubbed the opportunity to take advantage of the ECB’s offer to purchase Spanish debt, fully aware of the austerity demands that will accompany such intervention. Rajoy is under enormous pressure domestically, with the rich Catalonia region demanding independence and fierce protests taking place in Madrid over existing austerity measures. The market is likely to have to wait until after regional elections held on October 21 for Rajoy to bite the bullet, which leaves a good three weeks of frustration ahead. That said, if rating agency Moody’s cuts Spain’s credit rating to ‘junk’ status, then a spike in Spanish bond yields could force Rajoy’s hand a little sooner.

Greek saga remains volatile

The situation in Greece also remains typically uncertain. October is an important month too, with some chunky bond repayments maturing. Disagreements not only exist between Greece and the Troika (EU, ECB and IMF) but between the IMF and the EU. With the Greek debt profile blown even further off track by a deeper than expected recession, the IMF is now pushing for another Greek debt restructuring in order to get its debt sustainability back on track. Unsurprisingly, more ‘haircuts’ is not at the top of the EU’s list of priorities.

It looks as if there is some consensus over giving Greece an additional two years to meet its targets and the government appears to have been reached an agreement for €13.5bn in additional spending cuts that they hope will unlock the vital next tranche of aid. However, the agreement still needs Troika approval and would need to be approved by the Greek parliament, which amid violent public protests in Athens is no dead cert. Speculation has surrounded the need for a third Greek bailout but this option looks to be a non-starter as it would require parliamentary approval from individual member states. The bottom line is that Greece may well leave the eurozone but EU leaders are unlikely to let this happen while conditions in Spain remain so tense. The pressure for stronger signs of progress will be turned up once again at the next EU Summit on October 18-19.

Sterling has recouped its mid-September losses against the euro and is back trading above the €1.25 level. With market confidence so shaky at present, any concrete progress - most importantly from Spain in the form of a bailout request – will likely give the euro a significant lift. However, our baseline scenario is that this will not occur and that sentiment will continue to weaken towards the euro, helping sterling to build on its domestic economic resurgence and resume its uptrend against the euro.

GBP/USD

Dollar to strengthen despite QE3

The US Federal Reserve finally pulled the trigger on QE3 in September, which meant it was another very soft month for the US dollar. There have been some bright spots amongst US figures in the past month, with trade balance, retail sales and consumer confidence figures all showing some improvements. However, there has been plenty of evidence of continued economic weakness to support Ben Bernanke’s decision to turn the printing presses back on; last month’s key employment update gave little to cheer about. In addition, the final US GDP figure for Q2 was sharply and unexpectedly revised down to 1.3% from 1.7%.

The issues of weak US economic growth and a long period of quantitative easing are by no means at the top of most investors’ list of concerns. The US dollar has strengthened a little in the past fortnight, amid waning euphoria surrounding the QE3 announcement and the ECB’s pledge to purchase peripheral debt. Spain has not asked for a bailout, Greece has not secured its next tranche of aid and growth across the world is slowing. These are all dollar-friendly factors and the slowdowns being seen in China and the eurozone (including Germany) are of particular concern.

Whilst UK growth data has been remarkably positive in recent weeks, the ongoing fragility of the UK recovery has already been highlighted this week by a weaker than expected manufacturing figure. If sterling is to avoid another short-term sell-off against the US dollar, the UK services figure released on October 3 must be firm. However, sterling should get plenty of support in the form of the preliminary Q3 UK GDP figure released on October 26; we are looking for a robust quarterly showing of around +0.6%.

As things stand, sterling is trading almost two cents below September’s 13-month high of $1.63 and we think this high will remain a ceiling for this pair. Regardless of QE3, we see plenty of scope for increased demand for the safe-haven US dollar. We are still anticipating weakness in the EUR/USD pair, which should send GBP/USD back below $1.60 in October. 

Richard Driver

Currency Analyst

Caxton FX