Tsunami hits Japan- how have the currency markets responded?

Japan has suffered from one its most powerful earthquakes for a century, unleashing a devastating tsunami across its northern coast. Today’s events follow last month’s earthquake in New Zealand, and January’s flooding in Australia. Japan represents the world’s third largest economy and the effects of this disaster are being felt throughout the global financial world.

The immediate response to the quake saw the Japanese yen fall across the board. This is understandable; it comes only two days after Japan announced that its economy slipped back into contraction last quarter. However, the market’s slightly longer-term response to the quake is somewhat counter-intuitive.

Since its initial dip, the yen has rebounded very strongly against all its counterparts as the markets. Why? The yen is one of the world’s few safe-haven currencies, which investors turn to in times of uncertainty. The earthquake may have occurred in Japan, but the global financial markets are intertwined and the widespread concern that has been triggered has seen the yen appreciate impressively. Market appetite for safety had already been heightened this week amid soaring oil prices, turmoil in the Middle East and North Africa, and eurozone debt concerns – this earthquake merely confirms this recent investor mindset. Accordingly, other safe-haven currencies such as the US dollar and the Swiss Franc have today strengthened against riskier assets such as the euro and sterling.

So will the yen continue to benefit from the earthquake? This will not be clear until the extent of the damage to the Japanese economy is ascertained. If Japan’s last major earthquake in 1995 is anything to go by, then the yen will continue to appreciate impressively. But the yen has heavily underperformed this year and with Japanese interest rates low and growth prospects poor, it will take prolonged risk aversion for this downwards trend to be reversed.

In other Caxton FX-related news, it was excellent to see fellow analyst Duncan Higgins quoted by Reuters today on his UK rate rise forecast.

Richard Driver
Analyst – Caxton FX


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Trichet slams inflation, bolstering euro

“An increase of interest rates in the next meeting is possible.” So spoke Jean-Claude Trichet at the ECB’s press conference earlier today. This, and similarly hawkish comments throughout the conference, have brought forward market expectations for an ECB rate rise by five months! The market now expects to see the ECB move the base rate from 1.00% to 1.25% at their meeting in on April 7^th.

As detailed in my previous blog-post there were rumours that Trichet would be overtly hawkish in calling for the inflationary pressures to be quashed. He did not disappoint. Indeed he went above and beyond expectations stating that “strong vigilance” is required.

The upshot of all this? The euro has had a storming day! Against all 16 of its major counterparts the single currency has climbed, hitting a fresh four month high versus the US dollar at $1.3974, breaking strong resistance at $1.3950. It has also put the sterling price back to 1.1650.

The reasoning behind this sharpened rhetoric from Trichet comes from higher inflation, stemming from rocketing oil prices (and other commodities), which have pushed inflation levels above the ECB’s 2% target.

Adding to sterling’s woes, the pound stumbled following a disappointing reading of activity in the UK services sector, undoing the improved sentiment seen earlier in the week off the back of positive manufacturing and construction data.

The services PMI index fell to 52.6, down from an 8-month high of 54.5, underperforming market expectation.

Although the figure doesn’t exactly signal Armageddon (all key industries are still in expansionist territory), weak fundamentals and jitters about the stability of the economy will leave the pound vulnerable to investors paring back their expectations for an interest rate hike.

So what does this all mean going forward? I fear that we have may seen a game changing statement today. Sterling’s prospects against the euro do not look nearly as healthy as they did yesterday. We still feel that further upside against the US dollar is due, though this move will likely be one of dollar weakness. Downside risks for sterling/euro have swung into view…

Ewdard Knox

Analyst - Caxton FX

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Sterling plummets as economy contracts

There was a shock to the system today, as the pound endured the currency equivalent of falling into an ice cold lake. GDP figures released this morning showed that the British economy contracted by 0.5% in the three months through December.

Although this was a first estimate, the realisation at just how poor these figures were (market forecast was a full percent higher) caused the pound to sink across the board. It fell over 2 cents against the US dollar and a cent over its euro neighbour in just a matter of minutes.

With Johnson out, the incumbent Shadow Chancellor Ed Balls will be smacking his lips at the prospect of getting stuck into Tory manifesto, hounding Cameron and Osborne for “complacently congratulating themselves” for securing the economic recovery back in the Autumn and urging the government to pause and "rethink" its deficit-reduction strategy.

Indeed it appears the back slaps may have been a little hasty. With the economic recovery grinding to a halt, arguments for an interest rate rise will surely have gone into full retreat. Adam Posen is another man who probably wore a wry smile on his face today. His dovish stance is likely to have attracted some followers among the MPC members, although an accompanying vote for QE is less likely with inflation as high as it is.

The question is, just how much will this new data affect policymaker’s decisions? It’s worth noting, however excitable/nervous the market gets over this figure, it’s only estimated data - I’m not expecting the Bank of England to fully reassess the strength of Britain’s economic recovery at this stage. We did also see a staggeringly bleak December weather-wise, and history tells us that the UK isn’t overly competent in the snow. How much did this adverse weather affect our growth? Osborne, understandably, thinks a lot.

What this data has done is to mark a substantial step back for Britain, and it could force downward revisions to both 2011 and 2012 growth forecasts. Sterling’s forecasted turnaround in trend against the euro also looks to have taken a step back. So the question now is just how long will this hangover last?

Duncan Higgins

Senior Analyst – Caxton FX
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Euro continues to gain but turnaround seen

The pound has started the week in much the same way as it ended the last: on the back foot. Steadily the UK currency is finding its early year gains being eroded as the market reassesses the situation in the eurozone.

To be honest this is a trend that we’ve become accustomed to. The euro started the year a long way from favour amid growing concerns about Portugal. However, following a couple of successful bond auctions and supportive comments from both Japan and China, the euro has staged a recovery. Indeed demand for the single currency from Far Eastern buyers has been particularly pronounced recently. The question now is how far can the euro go before it begins to trend lower once again?

Against the dollar, the euro has climbed to a two-month high this afternoon at $1.3665. However, there is growing speculation that $1.37 will prove too appealing a level for investors to ignore and they’ll start to sell the currency once again. In the longer term the underlying problems embroiling the eurozone are bound to re-emerge and it’d be a brave man who argued that the euro has much shelf-life at its current level.

Turning focus to this week, the economic calendar is filled with high profile announcements. Fourth quarter economic growth figures from both the UK and the US are due; the minutes to the Bank of England’s latest meeting are scheduled; and the Fed will give its first policy update of the year.

This barrage of announcements should keep the markets lively. But for those hoping the pound is on the verge of mounting a full scale attack on €1.20, they’ll have to wait a while longer. Ireland's latest political turmoil, although cause for concern, is far from the catalyst needed to dampen euro spirit. Even higher UK interest expectations are struggling to lend much support at present. When the argument is fully explored, it’s still pretty unlikely that the Bank will nudge; how is a 0.25% hike going to curb rising oil prices exactly....?

Duncan Higgins
Senior Analyst – Caxton FX
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The euro’s slide continues

Despite disappointing data from both the UK and US, the euro has not been able to make up any lost ground.

Sterling did take a slight knock this morning as the UK’s Services PMI figure came in at 49.7, well below the expected result of 52.9. However, any losses were soon regained and the pound hit an intraday high of €1.1855 against the single currency.

Aside from some slightly disappointing employment data, the greenback continues to climb. The euro is now just a shade away from collapsing below $1.30 and who would bet against the move coming as early as tomorrow?

The 17 nation currency continues to go from bad to worse. What would normally be bullish news, a successful Portuguese bond auction, turned sour as the premium Portugal will have to repay went up by well over 100 points. The news that the EU is potentially going to issue Europe wide bonds (rather than country specific) smells horribly like the actions bankers took in combining securities that got the world in this mess in the first place. Next week Italy and Spain will both have their first bond auctions of 2011. It will be very interesting to see what premium they will have to pay to secure finance. All-in-all, this storyline has legs and will dominate most of 2011.

In other news, well not that far from the apple tree, China’s shopping spree for entire nations (behind FT paywall) continues as they pledge to buy €6billion of Spanish debt. This is being viewed as a simple engagement to try to open up foreign markets to Chinese exports. However, with their cheaper yet comparable products, ownership of foreign government debt, vast currency and commodity reserves, could this be just another move to knock America from the top of global economics?

Tom Hampton

Analyst – Caxton FX

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Sterling slips against the dollar

Sterling is down against a broadly firmer US dollar but remains at a seven week high against the struggling euro, currently trading at $1.6070 and €1.1820 respectively.

The greenback extended its gains from last week as better than expected retail sales data prompted a group of Republican economists to launch a campaign calling for the Fed to reduce its quantitative easing plan. The dollar index (a measure of the dollar’s value in comparison to a basket of currencies) hit a six-week high while the 10-year US treasury yield rose to its highest in two months and the 5 year yield rose more than 10 basis points (higher yield prices will drive up demand for US bonds).

Further concerns over the European debt crisis have sent the pound higher against the single currency today. Ireland is currently the nation under the kosh at the moment. It has been reported the Irish have rejected a bailout package from the ECB. The offer may still be taken up however, as Irish debt is currently running at over 30% of GDP, Anglo-Irish and Allied-Irish banks combined debt is roughly equal to a full years GDP. A statement from the emerald isle earlier today mentioned that they have enough liquidity to last ‘most of 2011.’ This does not sound like a long-term solution and some sort of bailout is surely necessary? (This could ironically be euro positive)

A raft of UK data out this week along with the B of E minutes from their November meeting could send the UK currency even higher as there will be very little support for further monetary easing.

Tom Hampton
Analyst – Caxton FX

Sterling goes into freefall against the euro

In a topsy-turvy session the pound is down today against all of its major counterparts except the greenback. The UK currency plunged through support levels to be down almost a percent on the day against the euro, currently trading around €1.1660. However, sterling did enjoy gains against the US dollar, hitting an intraday high of $1.5713.

Sterling’s abysmal performance this week was not helped by the dovish tone of the MPC minutes from the meeting on September 8th. The notes showed an 8-1 vote in favour of holding interest rates at a record low of 0.5% with Andrew Sentence repeating his lone call for a rate hike. Comments from members showed genuine concern about the growth outlook for the economy and the very real potential for more quantitative easing.

Duncan Higgins, Senior Analyst at Caxton FX said ‘Despite the consumer price index holding at 3.1% last month, the members see little change in the upside risk to inflation. As long as inflationary pressures are downplayed, it appears the door is likely to remain open to further quantitative easing, a prospect that will continue to weigh on sterling going forward.’

In other news, last night the Federal Reserve lowered the level at which it would intervene with what it is being called Quantitative Easing II (QE2) causing the market to choose the path of least resistance and sell the greenback.
Tom Hampton
Analyst Caxton FX

US GDP faces downward revision, stirring Fed into action

A report tomorrow is due to reveal a sharp downward revision to second quarter growth in the world’s largest economy.

The market is expecting to see US GDP (which is reported on an annualised basis) revised down significantly from an initial estimate of 2.4% to just 1.5%. This update will mark a low point amid a lengthening run of disappointing figures from the US economy and could be the catalyst for Fed intervention.

Duncan Higgins, senior analyst at Caxton FX comments, “The market has long been speculating that the Fed will need to add further stimulus to avoid falling back into recession. Positive news has been thin on the ground for some time and already estimates are suggesting that third quarter GDP is likely to be a lot lower if not negative. Recovery in both the housing and labour market has all but stalled and there is a good chance that a downward revision to GDP will spark further intervention from the Fed.”

World leaders have begun a meeting today in the US to discuss the notion of further monetary easing, with both the Japanese and eurozone economies also showing renewed recessionary pressures.

“Direct monetary stimulus could still be a few weeks away, but the conclusion of the meeting may well reveal that central banks are gearing up to take action. Hints of that nature are likely to cement the already risk adverse sentiment widespread in the market,” continues Higgins.

For the US dollar, the data tomorrow may be tricky to fathom. The traditional risk-on, risk-off scenario has broken down recently.

Higgins adds, “Investors are still trying to decide whether to sell the dollar on negative data on buy it up as a safe haven. The yen and Swiss franc have been preferable currencies of late. However, we expect the market to swing towards risk aversion, particularly if the Fed is not alone in a decision to extend quantitative easing measures.”

“At present the euro is trading above $1.27, but we doubt that the price will sustain these highs going into the weekend. Sterling also looks risky at its current level above $1.55. However, no revision is expected to the UK’s 1.1% second quarter growth rate and this should prevent the pound from sliding,” concludes Higgins.

Sterling down across the board

Sterling is down on the day against all its major counterparts amid speculation on the publication of the MPC meeting minutes tomorrow morning. The CPI figure came in at 3.1%, well above the Bank of England’s target of 2%.


In other news the euro received a boost following solid demand for bond auctions in Ireland and Spain, which helped ease concerns about EU funding. Against the dollar, sterling has managed to claw back early losses to currently sit a third of a cent down due to higher demand for riskier currencies.

Despite today’s setback, we expect to see the UK currency strengthen against the euro over the coming weeks as fears over the EU’s sovereign debt issues return to focus. The regional debt issues should also send the single currency lower against the greenback, leaving sterling/dollar to trade in a relatively tight range between 1.56 and 1.60 in the medium term.

Risk aversion returns

Following dovish statements from both the Fed and the BoE, there appears to have been as shift in risk sentiment a safe haven currencies make big gains on the day.


Ben Bernanke announced last night that the Fed would be taking measures to stimulate the US economy, however, it would not be going as far as full quantitative easing. Likewise, Mervyn King today revised the UK’s growth predictions down while raising inflation figure expectations. These bearish moves plus poor global economic data all weak have moved sentiment towards risk aversion, sending the dollar well over 1.5 cents up against both sterling and the euro on the day.

Worse than expected figures from the US could be elevating the Japanese yen (and to a lesser extent the Swiss franc) to the position of the world’s favoured safe haven as it has risen to a 15 year high against the dollar.

Sterling buoyed following Bank decision

As was widely expected the Bank of England (BoE) left interest rates unchanged at 0.50% again this month and chose not to extend the quantitative easing programme beyond its £200b limit.

The decision has given Sterling a slight lift to bring it away from its day lows, which were hit following Barclays announcement of “disappointing” second quarter profits.

BoE Governor Mervyn King reiterated recently that it may be a “considerable” time before the benchmark rate returns to “normal.” Although today’s announcement offers few surprises, minutes to the meeting, due to be released on the 18th August, could offer up some interest with a split widening between the Monetary Policy Committee (MPC) members about the danger posed by rising prices.

Duncan Higgins, senior analyst at Caxton FX comments, “The views within the MPC are clearly divided. Andrew Sentence is expected to have voted for an interest rate rise for now the third month in a row. However, despite the UK’s strong rate of growth in the second quarter, there is little to suggest that he will find any support from his colleagues. King appears happy to tolerate the comparatively high level of inflation in order to safeguard the recovery.”

The rhetoric at present is still not pointing to an interest rate rise until mid 2011 at the earliest. This is based on the fact that the possibility of adding further monetary stimulus is still very much on the table.

“With budget cuts implemented and the debt crisis in the eurozone, the UK economy is unlikely to offer up the same level of growth in the third quarter as it did in the second. In fact economic figures for July already reflect a slight slowdown in activity. In the short term, the Bank can do little about inflation and so policymakers are likely to continue taking a wait-and-see approach whilst the outlook remains so uncertain,” continues Higgins.

The reaction in the currency markets has been relatively limited with market players awaiting the policy decision and accompanying statement from the European Central Bank later this afternoon.

Higgins says, “Sterling has recovered from its day low against both the euro and the US dollar following the announcement, but progress remains slow. Having neared $1.60 on Wednesday, the pound is unlikely to push through that level amid caution ahead of Friday’s US non-farm payroll figures.”

At present Sterling remains range bound between 1.20 and 1.21 against the euro, and is trading just above 1.59 against the US dollar.

Sterling’s rise

Sterling surpassed expectations on Monday to reach a six month high of $1.59 against the dollar in London.

A rise of 2.36 cents was spurred by investors betting that growth in the UK would outpace that in the US, which some economists fear is only months from slipping back into recession.

This morning sterling is further up against the dollar trading at $1.5925 and edging ever closer to the €1.21 against the euro.

There seems to have been a genuine shift in risk appetite in the market as the euro/dollar rate hit a high of $1.3179 yesterday, showing that concerns over the euro sovereign debt crisis may have been papered over recently. We expect to see a pullback between this pairing as cracks will inevitably start to re-appear in Europe’s finances.

Caxton FX comments on UK Emergency Budget

Head to Interactive Investor to listen to Duncan Higgins, senior analyst at Caxton FX, comment on George Osborne's inaugral Budget.

Caxton FX launches dedicated currency report for NGOs

Non-Governmental Organisations (NGOs), who operate overseas, regularly require ‘exotic’ currencies whose movements are rarely publicised.

Caxton FX, foreign exchange and payments specialist, understands the importance for NGOs managing risk within the volatile currency markets. Daily analysis of ‘hard’ currencies such as the US dollar and euro are readily available and although useful, NGOs, such as charities, often need information regarding softer currencies.

According to a report by “Stamp Out Poverty”* between £20 - £50,000,000 is being lost by UK Charities by the method they transfer money overseas. Regular analysis of currencies across the developing world could be used as a tool to help make informed decisions regarding currency transfers.

Caxton FX is pleased to announce the launch of their NGO Currency Report this week. The inaugural report, which forecasts over 30 world currencies during a 6 month period, provides a clear and concise overview of each currency to aid budgeting and planning.

To join the distribution list or for further information, send an email to charities@caxtonfx.com


* “Missing millions” http://www.stampoutpoverty.org/?lid=11155

Sterling knocked off its highs by UK Inflation

The headline rate of UK inflation has slowed, dipping to 3.4%, according to data released this morning.

This figure is marginally below market forecasts, having hit a 17-month high in April. As a result, there has been a knee-jerk sell off in the pound as the prospects for an early interest rate rise ebb further away. The Bank of England has been persistent in holding its line that inflation will begin to fall, despite its continued rise over the past six-months. Today’s figure will certainly come as a relief for the Governor, whose stance was becoming increasingly undermined.

Duncan Higgins, senior analyst at Caxton FX explains, “Mervyn King can perhaps now breathe slightly easier. Pressure was mounting, and officials were beginning to speak out about the unnerving rate at which inflation was rising. Today’s figure may be the turning point that the Governor was looking for and inflation may now begin to steadily fall back.”

The VAT rise back in January had been one of the leading factors behind the rise in prices. With its influence now coming to an end, spare capacity in the economy is putting downward pressure on inflation.

“Temporary factors driving prices higher are now beginning to fade and spare capacity should become increasingly important, helping to put inflation on a downward path,” continues Higgins.

The troubles in Europe will also weigh on prices. “As economic growth slows in the eurozone, demand for UK exports will weaken, driving prices back down.”

Although the headline remains some way above the 1.0% leeway afforded to the Bank, sterling has come off its highs.

Duncan Higgins concludes, “There is now likely to be far less pressure to prematurely raise interest rates. Headline inflation still has some way to fall before meeting the 2.0% target, but it appears that factors applying upward pressure are now subsiding.”

The pound has weakened to sit at €1.2050, and has dropped back from its intra-day high to trade marginally above $1.47 against the US currency.

Sterling holds steady as UK growth forecasts are revised

The newly established Office for Budget Responsibility (OBR) announced a downgrade of potential economic growth in 2011, within their inaugural report released this morning.

Back in March this year, the Labour government had forecast growth of between 3.0 – 3.5% next year. The OBR now predicts that the economy will expand by just 2.6% and have revised down their growth forecast for this year, with an estimate of just 1.3%, against the former Chancellor Alistair Darling’s original estimate of 3.0%.

Duncan Higgins, senior analyst at Caxton FX commented, “The reaction in the market has not been too pronounced with the market widely expecting a downward revision. The figures are reflective of the upcoming budget cuts, which are likely to weigh on economic activity for some time.”

The OBR also gave a renewed forecast of the UK’s public deficit, estimating that it will fall to 10.5% of GDP in the 2010-11 financial year, down from Labour’s 11.1% estimate.

“The lower deficit forecast is certainly a positive, but the market is waiting to see exactly where the cuts will fall before reacting. Sterling has crept higher against the dollar in the wake of the report, but direction is still largely being dictated by movements in the equity markets,” continues Higgins.

At present the pound is trading back near a one-month high against the US currency, back above $1.47. Against the euro, the pound is holding station just above €1.20.

Sterling brushes off weak production figures

Figures released from the UK manufacturing industry this morning have disappointed, with production down 0.4% in April, undershooting market expectations.

Although the data missed forecasts by a considerable margin, the year-on-year rate remains in positive territory. UK industrial production mirrored this figure, also disappointing expectations and failing to reflect the positive numbers seen from the Purchasing Managers’ indices recently. Reaction to this latest economic news has been rather unpronounced within the markets, with investors looking at the equity markets to dictate direction.

Duncan Higgins, senior analyst at Caxton FX says, “These figures will serve as a stark reminder that the UK economic recovery is still far from assured. Although the majority of UK fundamentals are still trending upwards, the upcoming budget measures are going to provide a significant hurdle.”

Sterling has come off its highs following the release, but remains holding around €1.21.

“The pound’s foundation above €1.20 remains intact, with data continuing to have only a minimal impact on the currency markets. Investors remain focused on wider developments from the eurozone at present, which is keeping sterling on a solid footing,” comments Higgins.

In spite of the weak figures today, we expect that sterling could progress higher over the short term.

Duncan Higgins concludes, “The euro is still suffering from a severe lack of market confidence, and despite the efforts of ECB President Trichet to calm fears, investors remain sceptical. The single currency can only achieve brief rallies, and these are predominantly based on profit taking as opposed to any real shift in sentiment.”

At present sterling is trading at €1.21, and is around half a cent down on the day against the US dollar at $1.4650.

Bank of England hold interest rate at record low

Coming as little surprise to investors, the Bank of England announced that interest will remain unchanged at 0.5%, alongside the level of quantitative easing holding at £200 billion.

With a Budget due in a little less than two weeks, the Bank is expected to remain on the sidelines. They are likely to wait and see what impact the fiscal tightening has on the economy before revising their latest projections.

Duncan Higgins, senior analyst at Caxton FX says, “With spending cuts and tax rises just around the corner we are unlikely to see a change in interest rates this year. The fear is that the measures the government is due to implement could destabilise the recovery and raising rates prematurely would exacerbate the problem.”

In the past few months pressure has been building that the rising level of inflation would force the Bank to intervene and raise rates, but these pressures are easing.

“The Bank has stubbornly stuck to its line that inflation will fall below the 2.0% target in the medium term, despite growing dissent. Increasingly, factors do point to inflation subsiding. Troubles in the eurozone are showing little sign of easing and falling demand from the continent will put downward pressure on prices. This will be compounded by weaker domestic demand as the full impact of tax increases and spending cuts is felt,” comments Higgins.

The markets have shown little reaction to the Bank’s decision and sterling is continuing to steadily appreciate ahead of the ECB’s press conference this afternoon.

Duncan Higgins continues, “The ECB is particularly pressured at the moment and internal conflicts are not helping. Officials will be keen to give speculators as little ammunition as possible, and we expect the information provided to be as vague as they can justifiably get away with.”

At present sterling is trading back near its 18-month high hit on Monday, but could move higher if Trichet fails to downplay growing fears about the eurozone’s financial stability.

How will the government’s proposed spending cuts impact sterling?

David Cameron paves the way for ‘painful cuts ahead that will be unavoidably tough’, with details in the emergency Budget on June 22nd.

The impact of any proposed measures has raised concerns about the prospects for the UK economy, particularly considering the fragile nature of the recovery. This could have a distinct effect on sterling as investors show caution against buying into the currency.

“The pound’s rally against the euro could come to an abrupt halt should the spending cuts prove to be too much too soon. The government needs to find a fine balance: one that sufficiently appeases the market’s desire to see the deficit cut, but falls short of strangling the fledgling recovery,” comments Duncan Higgins, senior analyst at Caxton FX.

So where does this leave sterling over the longer-term?

“Through the summer, we expect to see sterling’s rally against the euro continue, albeit at a more gradual pace than we have seen recently. Fears about the eurozone banking crisis are failing to subside and investors will be inclined to continue selling the currency, particularly as most eurozone officials seem apathetic, even content, with the euro’s slide,” says Higgins.

Duncan Higgins continues, “Into the longer term sterling’s strength could be undermined as the UK’s economic figures begin to reflect the spending cuts. April’s Budget forecast for economic growth in 2010 and 2011 could well prove to be optimistic in light of new government policy. The Bank of England, in order to shield the economy against the cuts, will also be far less inclined to raise interest rates, seeing an increased pressure on sterling.”

Services sector continues to expand but hurdles lie ahead

Data released this morning showed that the UK services industry continued to expand in May, measured by the Purchasing Managers’ Index (PMI).

Although the figure, of 55.4, was below market forecasts, it still underlines solid growth within the service sector. Service providers maintain high expectations of future growth but there are concerns building about the potential adverse effects of the government’s policies to cut the budget deficit. On the surface, recovery in the sector is encouraging but weak trends and fiscal tightening could see strains in the coming months.

Duncan Higgins, senior analyst at Caxton FX says, “It is certainly encouraging that the services sector is continuing to expand, but the upcoming budget cuts do cloud prospects for the industry. For the past year the sector has consistently been in positive territory. The risk is that this trend could be severed, with the proposed cuts expected to weigh heavily for some time.”

Unsurprisingly given the current macro trends, the data has had little direct impact on the currency markets with the pound continuing to trade around the mid €1.19s.

Higgins comments, “Economic fundamentals are continuing to be sidelined, with the eurozone debt debacle holding focus. The level of risk in the market is likely to continue determining currency movements, with the UK upcoming Budget also providing impetus for the pound,” continues Higgins.

“Whilst the underlying economic recovery in the UK remains buoyant and confidence towards the eurozone remains heavily subdued, we expect sterling to maintain its upward trend. Over the medium term, we expect that sterling could drift steadily toward €1.25, though the Budget will remain a key obstacle, “continues Higgins.

Currently sterling is trading just below 1.20 against the euro, unchanged on the day, and at 1.4650 against the US dollar.