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

Cable has peaked out at 1.69, at what seems to be a very high level, but that’s what analysts were saying at 1.61. Eurozone inflation is still the main concern, and with an ECB meeting this next week, we may see some action with the euro.

Global Equity markets have rallied and are approaching record highs yet again going into this week with positive sentiment coming from a slightly improved Eurozone inflation figure, positive non-farm payrolls and the US unemployment rate coming down, Dovish tones from the US Federal Reserve, and the UK economy on a roll with consistently positive economic data. These factors have managed to largely override the uncertainty that is affecting Ukraine and many currency pairings have benefited from the positive data, but the dollar continues to struggle.

UK – Sterling has performed very well in the previous week. The GDP figure came in just below target, but still positive at 0.8% q/q, and manufacturing data was positive on Thursday. The UK economic recovery is gaining momentum, but concern has been expressed by Bank of England policymakers that the rapid recovery of the housing market could be another housing bubble in the making.  The data to watch for this week will be the Official Bank Rate and Asset Purchase Facility, and Manufacturing Production m/m. Things are looking up for the Pound, and there seems to be very little chance that this trend will be reversed.

US – The US recorded a new record low unemployment rate this month at 6.3%, down from 6.7% last month. Also, the US non-farm employment change figures came in very strongly, signalling a recovery in the US labour force. This has helped the Dollar improve against most currencies, as the Dollar suffered earlier in the week with a dismal advance GDP q/q figure this last Tuesday, which was down to 0.1% from 2.6% previously. This week, important US data will include Yellen testifying before the Joint Economic Committee of Congress on Wednesday, and US unemployment claims data on Thursday. With mixed data this week, the dollar is looking for a direction to commit to, and next week’s data may help determine its direction more soundly.

EUR – Analysts are forecasting that the ECB most likely will defer action. Speculation has built before every ECB meeting  that action will be taken, in the form of further interest rate cuts or a new structure for Quantitative Easing, but so far the latest change was last November when there was a surprise interest rate cut. Inflation has picked up in April, but only marginally, from 0.5 to 0.7 percent. The market has begun the week with momentum behind the Euro as analysts are prediction that the ECB will defer possible action this time, and shift market expectation until the June meeting. Other data has been coming in on target, but Eurozone economic growth is still well below policymakers’ expectations. Only time will tell what the ECB has in store, and we will find out for sure this week on Thursday.

End of week forecasts

GBP/EUR – 1.2125

GBP/USD – 1.70

EUR/USD – 1.3950

GBP/AUD – 1.8150

Nicholas Ebisch

Corporate Account Manager

Caxton FX

EUR, GBP, JPY benefit from dollar weakness

The dollar index has fallen significantly over the course of the week. This bearish attitude toward the Dollar throughout the week was a result of the Wednesday FOMC meeting in which the members of the Federal Reserve board expressed concern about low levels of inflation. This led to speculation that interest rates will remain low for longer. The Pound, Euro and Yen stood to benefit near the end of this week, as alternative safe-haven currencies, and have increased in value in the last 24-hours as investors have shied away from buying the dollar.

The Euro has improved against its major counterparts as a positive ECB monthly bulletin combined with Greece selling over $4 billion worth of bonds to eager investors on Thursday. The high-demand for Greek bonds on Thursday drew attention to how much those markets have recovered since the days of the Eurozone crisis. With these facts fresh in the minds of investors, the Euro has received a recent bump higher, but these gains may be limited as we currently forecast Dollar and Sterling strength in 2014.

Nicholas Ebisch

Corporate Account Manager

Caxton FX

Conventional and unconventional policies possible from the ECB

The ECB decided to keep interest rates unchanged at 0.25% as expected, but language from ECB President Draghi was dovish and suggested we may see the central bank take action in the next few months. Draghi highlighted the fact that prolonged low inflation itself is a risk, and said the governing council have had a detailed discussion about the possibility of negative position rates. Narrowing the rate corridor and quantitative easing were also measures that were mentioned, with the President claiming QE would need to be designed carefully in order to be effective. Some light was also shed on the strength of the single currency but it was emphasized that any action taken would not be targeted at the exchange rate. Draghi reinforce the fact that he does not see deflation risks in the eurozone, but with these options playing a greater role in ECB meetings, we feel the concern is becoming greater. 

The governing council felt more information was needed about the medium to long term inflation expectations before taking any action, but with different instruments tailored to address various issues it is unclear on what tool exactly the ECB is leaning towards. With the latest reading of 0.5%y/y surprising Draghi, the likelihood of invention in the next few months is increasing.

Sasha Nugent

Currency Analyst

Caxton FX 

April 2014 Currency Report: Will the ECB finally take action?

Market sentiment towards the pound has shifted over the month as investors begin to reassess the likelihood of tighter policy from the BoE. Considering the strength of the pound over the last few months, it is not surprising that we are beginning to see a correction in the GBP/USD rate. With sterling starting the month in a more vulnerable position, upcoming data needs to at least be in line with estimates in order to support the currency.

Demand for the euro resurfaced towards the end of last month. The latest flash inflation estimate has shown price pressures eased further to 0.5%y/y. For yet another month, the market remains firmly focussed on the ECB and whether the latest reading will have any impact on their stance. Considering their forecasts into 2016 suggest inflation will rise, we doubt the central bank will alter policy when they meet later this week.

In the first FOMC meeting since Janet Yellen became Fed chair, comments from the central banker suggested the Fed has more of a hawkish bias than previously thought. This has put the greenback in a better position to begin the month, and another strong payroll figure could encourage more significant dollar buying. Further comments from FOMC members will be watched closely in order to gauge whether Yellen’s comments regarding tightening were a slip of the tongue or other members also carry a more hawkish view.

The market pares back sterling holdings

The pound has advanced significantly over the past few months especially against the greenback and this has been fuelled by rate expectations in the first half of 2015. Over the past few weeks however, demand for the pound has eased and investors are reviewing their holdings of the currency. The market now feels the currency has advanced too quickly and some market participants are paring back their expectations of tighter policy.

The inflation rate has also fallen considerably and the latest reading showed price pressure continued to ease. As long as inflation remains below the 2% the BoE will be justified in its stance to keep interest rates at its current lows. Therefore we doubt there will be any shift in policy from the central bank this month. UK data will need to remain broadly positive in order to keep the currency competitive as the market looks to penalise the pound for any disappointing UK figures.

GBP/EUR

Deflation worries haven’t faded yet

Last month the single currency was supported by the preliminary reading which showed Eurozone inflation edged higher to 0.8% y/y. This reading was revised back to 0.7% y/y but with the latest figure showing inflation fell further to 0.5% y/y there is no evidence just yet that price pressures are building. We know from the central bank’s projections that the governing council still expect inflation to head towards their 2% target, with price pressures just below the benchmark by 2016. With this in mind, it is unlikely that the ECB ease policy further when they meet in the next few days. Downside risks have yet to materialise and medium to long term expectations remain firmly anchored reducing the likelihood of any change in stance from the central bank. Nevertheless, as long as inflation remains around 0.7% the question of whether further easing is necessary will remain.

Asian buyers continue to support the single currency and as long as Eurozone data comes in at least in line with estimates, we suspect the push for lower levels in GBP/EUR and higher in EUR/USD will continue. It will also be interesting to see whether the ECB take this opportunity to talk down the euro. The central bank has avoided verbally weakening the currency but at the last meeting, ECB President Draghi shed some light on the effect a stronger euro is having on inflation. Until the bank outright objects to the euro’s strength we doubt investors will hesitate to boost the currency further.

GBP/USD

Can the greenback keep momentum?

Last month we witnessed a shift in rhetoric from the Federal Reserve and this was enough to at least get the market to buy dollars. In the last Fed meeting, Chair Yellen suggested that we may see US interest rates rise within the first half of next year. The central bank have said interest rates will remain low for a considerable time but the market was under the impression a “considerable” would be longer than 6months after the end of QE. Speeches from Fed members throughout the month will carry more weight as investors attempt to get a handle on the Fed’s more hawkish stance. Yellen may not have meant to give the market a timeline to look towards, either way, much more dovish talk is needed to distract the market’s attention from spring 2015.

Though the dollar is now in a more favourable position, much more impressive data is needed to keep the momentum going. Non-farm payroll figures will be published on Friday and as usual the market will penalise the greenback for any figures below consensus. We believe at least a decent reading will spur greater demand for the greenback, especially if other economic figures ahead of the release also prove to be positive. Provided the employment report is encouraging, we could see the downward trend in EUR/USD and GBP/USD really begin to take hold this month.

GBP/EUR- 1.2160
GBP/USD- 1.6500
EUR/USD- 1.3700

Sasha Nugent
Currency Analyst
Caxton FX 

Caxton FX Weekly Report: Will a lower inflation reading be enough to trigger a move from the ECB?

Retail sales gives sterling a boost, but will PMI figures keep the momentum
going?

Last week retail sales data gave sterling the boost needed to keep the currency competitive, especially against the euro. This week, a slew of UK figures should help the pound remain on the front foot, especially if PMI data continues to suggest growth in the manufacturing, construction and service sectors remained strong. The manufacturing and construction numbers will be of particular interest as the economy continues its efforts to shift away from its dependence on the service sector. Another drop in Eurozone inflation may give sterling a helping hand as the market builds its expectations of a response from the ECB. Things will be more challenging against the greenback as the all important nonfarm payroll figure is due this Friday and is expected to provide the dollar with some momentum. This coupled with some more hawkish language from Fed Chair Yellen could give the greenback the upper hand against sterling.

Asian buyers support the euro despite the drop in Eurozone inflation
This morning Eurozone inflation figures have showed price pressures continued to ease resulting in the y/y reading dropping to 0.5%. The ECB will announce their interest rate decision on Thursday and after this below expected figure, it will be interesting to see if this has had any effect on their stance. We know from the last meeting that the governing council believe inflation will pick up but this number may be a signal that downside risks could be materialising. As a result, pressure on the ECB to act is building, but we doubt the central bank will take action just yet. Despite the unexpected weakening in price pressures, the euro has been fairly resilient thanks to the support of Asian buyers.
Other figures published throughout the week such as Service PMI figures could offer the single currency further support. Upside surprise in unemployment data will be welcomed but on the whole we expect the single currency to be more vulnerable this week.

Dollar still fighting for strength but things could change this week
For weeks the dollar has been penalised for inconsistent data as the market struggles to really get a handle on the economic situation in the US. Some more hawkish comments from Janet Yellen has helped the greenback although an encouraging employment report will definitely help provide the boost the greenback needs. If non-farm payrolls comes in above 200k we could see a shift in sentiment towards the greenback as the prospect of an earlier than expected tightening of policy builds.
There will be more than enough data releases ahead of the employment report to provide the currency with momentum including ISM Manufacturing PMI, Trade Balance and Unemployment Claims. Provided these figures hold up well, there is no reason why we cannot see cable below 1.66 and EURUSD falling below 1.37. UK PMI data will attempt to limit the dollar’s gains but with focus on the US employment report, we feel this reading will take precedence.


End of week forecast

GBP / EUR	1.2120
GBP / USD	1.6600
EUR / USD	1.3690
GBP / AUD	1.8100

Sasha Nugent

Currency Analyst

Caxton FX

Caxton FX Weekly Report: Dollar in favour ahead of Fed meeting

Sterling loses its grip
As expected the pound experienced some weakness against the euro as the ECB held off from easing policy further, and PMI data failed to provide any upside surprise worthy of any significant strengthening. The week ahead presents a light calendar for sterling, which means there is a window open for the US dollar and euro to gain on the back of some strong figures. The main release for the week will be manufacturing production data, which will need to impress in order to keep the pound competitive and prevent any further downside in GBP/EUR. The Monetary Policy committee will appear before the Parliament’s Treasury Committee on Tuesday to discuss the BoE’s latest inflation report. We may see some movement on the back of remarks from Governor Carney, however, we doubt the hearing will have a significant effect on sterling strength.

The euro begins the week in charge
The euro begins the week on the front foot especially after the ECB held rates last week. Their projection into 2016 suggests that, despite inflation remaining below their 2% target, medium to long term inflation expectations are still well anchored. There was also some optimism about growth in the euro area, which provided the currency with some momentum. With the ECB unlikely to take action anytime soon, the euro should be well supported for the next few weeks.

In the days ahead, there are a few opportunities which could help the euro advance further, such as industrial production figures and trade balance data. We expect the light UK calendar will leave the window open for lower levels in GBP/EUR, however, we predict it may be slightly more challenging for the single currency
to drive the EUR/USD rate higher.

Non-farm payrolls provide the dollar with some relief
A slew of US data will be published in the next few days and this has set up the greenback for opportunities to strengthen. The dollar has been particularly vulnerable against the euro as EUR/USD breached 1.39 in the last session. US nonfarm payrolls provided the dollar with a little relief as the figure beat expectations adding 175k workers, preventing a third consecutive poor figure. This has eased pressure on the FOMC which may have been forced to put their tapering plan on pause if the employment report disappointed. The Fed is due to meet next week and for now it looks that the Fed could reduce asset purchases by another $10bn.

Retail sales data released on Thursday will be key, especially after the last reading showed a decline of 0.4% m/m. The market is expecting a rise of 0.3% m/m and any upside surprise will be welcomed considering the weakness we saw last week. Some solid numbers should allow the greenback to get a better handle on the
euro, however, with the amount of investors willing to support the single currency, we expect the dollar will be penalised for any poor results.

End of week forecast

GBP / EUR	1.2010
GBP / USD	1.6600
EUR / USD	1.3840
GBP / AUD	1.8350

Sasha Nugent

Currency Analyst

Caxton FX

No need for further action from the ECB.... for now

The ECB have decided to keep interest rates on hold for yet another month despite concerns that the euro area may slip into deflation. The last inflation reading provided upside surprise and the central bank’s projections show they expect inflation to increase only slightly this year to 1%, to 1.3% in 2015 and 1.5% in 2016. Therefore, the ECB’s medium to long term projections of inflation still remain well anchored and predict inflation will be slightly below the 2% in the fourth quarter of 2016. The ECB remain ready to act however considering the governing council see their “baseline by and large confirmed”, the likelihood of further easing has been reduced.

Taking into account the euros strength over the past few months, it is worth noting that ECB President Draghi estimated that inflation had be reduced by roughly 0.4 or 0.5 percentage points due to the strength of the single currency. Nevertheless this has not discouraged the market from buying euros pulling the GBPEUR rate below 1.21, and EURUSD through 1.3830.

Sasha Nugent

Currency Analyst 

Caxton FX

Caxton FX Weekly Report: Another poor employment report could hurt the US dollar

Can sterling remain in favour?

For yet another week sterling has remained fairly robust, although Eurozone inflation data encouraged some lower levels in GBP/EUR. In the days ahead, opportunity to pare back losses and we expect levels in cable remain elevated as the pound capitalises on weak US data. PMI data is back in focus and after the last round of slightly below expected figures, solid numbers here should keep the pound in demand. What will be key is to see growth in both the manufacturing and construction sectors continue to suggest the economy is gradually rebalancing. The BoE will meet again and announce their interest rate decision which we suspect will not result in much market movement. The outlook for the UK remains positive and as long as UK data continues to display this picture, it is more than likely that sterling buyers will continue to encourage a stronger pound.

ECB to remain on hold after eurozone data
The euro has started this week on a high, and it is unlikely that the ECB will pull the rug just yet. Eurozone inflation rose 0.8% y/y easing the pressure off the ECB and dampening expectations that the central bank will take action at their meeting later on this week. An above expected number hasn’t exactly removed the concern just yet. The reading was only a flash estimate which means there is always room for a downward revision. One thing that seems to be clear is there’s not sufficient evidence to warrant a change in policy from the ECB, and this should keep the euro well supported. Other figures such as retail sales, services PMI data and German factory orders could also support the single currency, although it will be difficult for the euro to advance further against sterling. With the dollar on the back foot and plenty of event risk ahead, disappointing US data could fuel a move further through 1.38 this week.

Third time lucky?
US non-farm payrolls is one of the most influential data releases and after two readings below estimates, this particular reading will be scrutinised. Although remarks from Janet Yellen last week suggest that softer data may not necessarily warrant a pause in tapering, a poor release on Friday may actually change the view of Chair Yellen. Ahead of the release a number of US figures will be watched carefully, as a number of data releases over the past month were affected by adverse weather conditions. Some more positive releases this week should see the greenback in better form, especially if payrolls provide some upside surprise.

The greenback may also receive a lift on the back of tensions in Ukraine. Russia has deployed military forces into Ukraine and they have now taken over army bases in Crimea. As the situation escalates and the West urge the Russian President Putin to withdraw troops, investors move towards safe havens currencies as the prospect of war increases. This should provide the greenback with a little more support, although the extra momentum will not limit the downside if the employment report disappoints.

End of week forecast

GBP / EUR	1.2170
GBP / USD	1.6650
EUR / USD	1.3740
GBP / AUD	1.87

Sasha Nugent

Currency Analyst
Caxton FX

Caxton FX Weekly Report: All eyes on the BoE

It’s time for the Inflation Report

After taking a slight hit last week, there may be more weakness to come for sterling as the BoE will release their inflation Report. After the unemployment rate unexpectedly dropped to 7.1%, the market has been speculating where forward guidance will go from here. Some analysts believe the central bank will lower the unemployment threshold further. In a speech a few weeks ago BoE Governor Carney said forward guidance will no longer focus solely in unemployment, but rather a broad range of factors. The central bank is also expected to raise its growth forecasts once again, and more importantly we expect Governor Carney to reiterate the fact that there is no need at present to raise interest rate anytime soon.

Any dovish language from the central bank will weigh heavily on the pound. Slack in the economy remains and we expect the Governor will draw some attention to this. With the lack of UK data and the BoE likely to dampen any rate hike expectations, it will be a difficult week ahead for the pound.

Eurozone GDP steps up

In the ECB press conference the central bank claimed they need more information in order to assess the likely path of inflation going forward. This week’s main release will be GDP figures which will provide the central bank with a better indication of where growth is for the Eurozone. The decision to hold off for a month allows the ECB to compile its latest macro-economic projections and for the first time, officials will be looking two years ahead, providing growth and inflation estimates for 2016. The ECB have been investigating a range of policy options, and these projections as well as GDP figures will be crucial when the central bank decide what policy tool is appropriate, as well as and whether or not to take any course of action.

President Draghi will speak on Wednesday ahead of the GDP release and the market will keep their ears peeled in case of any dovish talk. Strong GDP numbers will be key for the euro’s performance this week and could potentially push through support levels driving the GBP/EUR rate below 1.20.

A calmer week ahead for the US dollar

Last week was filled with volatility as investors tried to position on the back of the US non-farm payroll figure. Things are a little more settled for the dollar this week and the main release will be retail sales. The last employment report has displayed a confusing picture as non-farm payrolls were below estimates whilst
unemployment beat expectations. With the dollar in an uncomfortable position as investors struggle to make sense of the employment report, solid numbers should offer the greenback some support.

 The dollar may also benefit at the expense of sterling and the euro. Dovish rhetoric from the BoE could weaken the pound and with dollar buyers waiting in the wings, we expect the greenback to capitalise. Similarly, following the ECB press conference last week, attention is now on Eurozone GDP data. If these numbers disappoint, it would be an excuse for the dollar to drive EURUSD downwards. Fed Chair Janet
Yellen will testify on the Semi-annual Monetary Policy Report before the House Financial Services Committee and the Senate Banking Committee and this could also cause some volatility.

End of week forecast

GBP / EUR	1.1970
GBP / USD	1.6340
EUR / USD	1.3600
GBP / AUD	1.8200

Sasha Nugent

Currency Analyst

Caxton FX

No action from the ECB for now

The euro has been given a boost from less dovish remarks by ECB President Draghi, following the rate announcement which saw the central bank keep interest rates unchanged at 0.25%. The language was fairly unchanged considering what we have heard from the ECB in the last few months, however the unexpected dip in inflation had the market anticipating a more negative statement.

Draghi continued to emphasize the central banks focus on its medium to long term inflation expectations, claiming that more information is needed for the ECB to take action. The slip in inflation back to 0.7% y/y hardly affected the central bank’s stance and despite prolonged low inflation being a risk within itself, Mr Draghi said “We are alert to these risks and we stand ready and willing to act”.

There has been a grey area over what tools in particular the central bank stand ready to deploy. Some analysts thought the ECB could stop absorbing the euros created from its Securities Markets Programme. Although Mr Draghi claimed that this was one of the options being investigated, he also highlighted that there are other instruments being considered.

So where does the ECB stand now? In the same position it did before. The governing council require more information before deciding on whether to act, and “expect key interest rates to remain at present or lower levels for an extended period of time”. With Mr Draghi insisting the ECB does not see deflation in the eurozone, it is no surprise that the market took this as an opportunity to buy some more euros.

Sasha Nugent

Currency Analyst

Caxton FX

February 2014 Currency Report: Where will the BoE’s forward guidance lead us?

The pound dominated trading last month and economic figures continued to support the brighter outlook for the UK economy. This may all change this month as the BoE release their Inflation Report and express worries about sterling’s recent strength. We may also see investors begin to profit take as the market questions the pound’s recent performance.

We have got a little closer to identifying what may be in store from the ECB. At the WEF in Davos, ECB President Draghi reinforced his view that deflation is not on the horizon for the euro area, and also claimed the central bank stand ready to fight against such pressures. This should keep the euro fairly supported although tighter conditions in the money markets will keep the pressure on.

After beginning their tapering programme in December, the Fed decided to reduce asset purchases further by another $10bn. Ben Bernanke definitely seems to have gotten the ball rolling with regards to withdrawing stimulus, but whether his successor Janet Yellen will keep this up is the question. Janet Yellen is regarded as a dove, and this may be reflected in her views of the economy going forward.


The BoE lines up more talk to weaken the pound

In recent weeks, BoE Governor Carney has displayed some concern about the strength of the pound. Most of sterling’s momentum is due to economic figures which have displayed a much healthier economy. The latest unemployment figure showed the jobless rate fell to 7.1% (the lowest level since the first quarter of 2009) and this has brought in to question where forward guidance will head now. In their last monetary policy meeting minutes the central bank saw no need to raise interest rates just yet, and this suggests that the bank are in no rush to tighten monetary policy even after the 7% threshold has been breached. At the WEF in Davos the Governor said that forward guidance will no longer be linked to just the unemployment rate, but rather a range of factors that reflect the overall state of the economy.

The latest GDP reading showed that the economy grew by 1.9% in 2013, the strongest level since 2007. Although this is an encouraging number, the latest labour market figures revealed that total hours worked grew by 1.1% meaning that output per working has fallen. These numbers highlight the issue with slack and productivity and it is likely we will see more focus on this in the weeks ahead.

GBP/EUR

A little insight into what may be in store from President Draghi.

Eurozone figures have shown some improvement over the last few weeks, especially PMI data which the market responded to well. Ireland has made a smooth exit from its bailout plan whilst Portugal looks on track to do the same. Despite some optimism brewing in the Eurozone, sterling still remains firmly in
control of the GBP/EUR as global deflation is a main concern especially in the Eurozone. At the WEF, ECB President Draghi explained that he does not see deflation in the Eurozone but rather a prolonged period
of low inflation. This language is similar to what we have heard from the central bank in the past few months but the surprise drop in inflation back to 0.7% y/y has kept the pressure on the ECB. More importantly,
Draghi explained that quantitative easing – an option adopted by both the Fed and BoE- was not on the table as the European Union treaty “prohibits monetary financing”. In order to combat the lack of lending in the euro area, Draghi said he favoured another approach which involved the ECB buying packaged loans.

The ECB will meet this week and announce their interest rates decision. Considering the bank’s views regarding inflation expectations and price stability, it is unlikely that we will see any change in policy. With regards to inflation, focus remains firmly on price stability and it is clear that downside risks need to materialise in order to see further easing from the ECB. Nevertheless, the market will be watching closely for any change in rhetoric from the central bank.

GBPUSD

Another taper from the Fed, and dollar momentum gets underway

In Ben Bernanke’s last FOMC meeting another $10bn of stimulus was removed from the asset purchase program thanks to a unanimous vote. A further reduction in stimulus has negative effects for emerging markets, yet no attention was drawn to the recent chaos which resulted in a number of central banks having to raise interest rates. The decision also suggests that the central bank is optimistic about growth and is not fazed by the last employment report. This result was widely expected and after months
of sterling directing the rate higher, we may be seeing the beginning of a downward trend in this pairing.

The last nonfarm payroll figure came in well below estimates, whilst the unemployment rate dropped from 7.0% to 6.7%. On the surface, the jobless rate may seem encouraging, but the fall was due to a reduction in the labour participation rate which declined to 62.8%, the lowest level since 1978. This is a medium-to-long term concern which could dampen the view of the labour market. Friday’s release will be just as important as the last, and two consecutive poor readings will bring the Fed’s decision to taper into question.

We expect the pound will weaken in the course of this month as remarks from the BoE weigh on the currency. This leaves the ball in the dollar’s court, and as long as the economic data supports an improving
economy, the downward trend in GBP/USD should continue.

GBP/EUR- 1.2150
GBP/USD- 1.62
EUR/USD- 1.3380

Sasha Nugent
Currency Analyst
Caxton FX

Caxton FX Weekly Report: The market focuses on the ECB

PMI data encourages more sterling buying

Sterling strength has held on, and a light calendar hasn’t stopped investors favouring the pound. Despite manufacturing PMI reading coming in below estimates, PMI data released in the coming days should provide the pound with support, especially if figures surprise on the upside. The BoE will announce their interest rate decision this week and considering recent comments from MPC members, we doubt there will be any change to policy. The market’s focus is now on the Inflation Report which will most likely see MPC members adjust forward guidance to focus on broader measures. As long as economic figures support a brighter outlook, demand for sterling will remain. The market is not yet convinced the central bank will maintain low interest rates and as long as there is a sense of optimism, speculation regarding the likely timing of tightening will continue to keep sterling on the front foot.

Inflation falls back to 0.7%, what will the ECB do?

In a number of speeches, ECB members have said they do not see the Eurozone entering deflationary territory. The markets however disagree, and some investors feel the ECB will need to act soon in order to prevent deflation. The last Eurozone inflation figure showed inflation eased back to 0.7% y/y and this has kept the pressure on the ECB. Some investors are speculating that the central bank will take action as soon as this week when the committee meet to discuss monetary policy. President Draghi has repeatedly said the ECB will be prepared to fight deflation and in the press conference this week we could hear more about the tools the bank favours, if and when they choose to deploy them. At the WEF in Davos, Draghi hinted the bank could buy packages of bank loans to households and companies.
This week Eurozone PMI data will be released but it is unlikely these figures will do much to bolster the single currency. The market is still willing to buy pounds and the dollar is also favoured over the euro leaving more room on the upside for GBP/EUR and downside for EUR/USD.

It is the non-farm payrolls time again

The Fed’s decision to taper assets purchases has brought the dollar back in control against many of its counterparts. However, the outcome of Friday’s employment report may bring the greenback’s recent strength to a halt. The last employment report disappointed, but the Fed shrugged this figure off when deciding to reduce QE further by another $10bn. Friday’s reading will need to come in line with estimates if demand for the dollar is to continue. The participation rate will also be important considering its recent decline.
There are a number of economic figures that will be released in the run up to the announcement and provided the readings are solid we could see demand for the dollar build ahead of the employment report. ISM Manufacturing PMI, factory orders, ADP Non-Farm Employment Change will all be published and this should offer the dollar some support in the days ahead. We expect the dollar to extend gains this week against both the euro and sterling.

End of week forecast

GBP / EUR	1.2175
GBP / USD	1.6300
EUR / USD	1.3420
GBP / AUD	1.8600

Sasha Nugent

Currency Analyst

Caxton FX

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

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

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

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

Sterling regains ground

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

GBP/EUR

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

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

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

GBP/USD

To taper or not to taper?

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

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

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


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

Sasha Nugent
Currency Analyst
Caxton FX

 

More euro optimism anyone?

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

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

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

Sasha Nugent

Currency Analyst

Caxton FX

Inflation figures give ECB a wakeup call

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

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

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

Sasha Nugent

Currency Analyst

Caxton FX

May EUR/SEK Report: Euro to pay the price for weak eurozone fundamentals

Neither of these two currencies is particularly high up the market’s wish list at present. The eurozone is languishing in recession and the ECB is easing monetary policy, while Sweden is dealing with an economic soft-patch and staring down the barrel of an interest rate cut of its own. The euro has held up remarkably well amid robust reserve manager interest but we do see this giving way to a fresh bout of euro weakness in the second half of this year.

A decline in the Swedish unemployment rate has been confirmed this week. This was in line with expectations and whilst we don’t expect major improvements in this area, we are confident that the labour market is stabilising after the weakness that has been such a feature of the past six months or so. In addition, data has evidenced a strong upward trend in consumer confidence, which is at its highest level since August 2012. This has translated into better domestic consumption, as shown by an impressive 1.6% rise in retail sales in Q1.

However on the industrial side, conditions remain highly uncertain. Confidence in the Swedish manufacturing sector is not quite so buoyant and figures have been mixed. We have seen an excellent 0.8% industrial production figure for March, backed up by an extremely impressive new orders figure of 10.5%. However, April’s manufacturing PMI, which pointed to contraction, remains a source of concern. The underlying trend in manufacturing is tilted slightly upwards but with eurozone growth failing, clearly conditions are highly vulnerable. In addition, a seemingly soft start to Q2 contributed to a disappointing budget deficit of 0.8bn in April.

In terms of Swedish monetary policy, the inflation outlook will be the key driver and the SEK will be highly sensitive to developments in this area. The news has been SEK-negative on this front; Sweden’s CPI figure for April saw a much larger decline than expected, with the annual rate falling from 0.9% to 0.5%. This figure undershot not only market expectations but the Riksbank’s own projections, which could well convince the bank to cut interest rates to 0.75% at its next meeting in July. There will be major focus on May’s inflation data next month, but in light of the strong SEK, soft-ish Swedish growth and high unemployment, the case for a rate cut is compelling and the Riksbank will probably bow to pressure in July. This poses a significant risk to the SEK’s performance this summer.

On the issue of the strength of the SEK, comments from Swedish officials have weighed somewhat on the currency as well. Riskbank Deputy Wickman-Parak confirmed that the central bank is monitoring developments closely but importantly, she did note that alarm bells are not ringing at current exchange rate levels. Finance Minister Borg also chimed in, “We are not in a situation today where the SEK is a serious problem, but potentially it’s a problem.” Market concerns in this regard will likely limit SEK upside.

As far as the euro is concerned, it’s been relatively quiet on the debt crisis front. The way in which the Cyprus crisis was contained has strengthened market confidence in the future of the euro and represents another indicator that the worst of the crisis could be behind us. A look at Spanish and Italian 10-years bond yields, which at 4.0% are at their lowest levels since the end of 2010, tells you how calm market nerves are with respect the debt crisis. While Italy may have established a much-needed government, political instability certainly represents a key concern. Public discontent with eurozone austerity is building constantly and this looks set to be the central threat to the euro moving forward.

Growth data from the eurozone has remained reliably poor in recent months. The Q1 GDP figures revealed a double-dip French recession, extremely weak German growth (0.1%) and yet another quarter of negative growth for the eurozone as a whole (-0.2%). The gravity of this depression hasn’t been lost on the ECB, which at last cut interest rates to 0.50% at its last meeting. More worryingly for those long of the euro is the declared openness of the ECB to the policy of negative deposit rates. If this option is utilised, the euro really will suffer.

This week’s May PMI figures from the eurozone are expected to show a degree of stabilisation but we wouldn’t be at all surprised to see them disappoint once again. On the bright side, Germany stands a decent chance of gaining some momentum in Q2, based on some impressive industrial order and output figures in March. However, broadly speaking we remain very bearish on eurozone growth and expect further ECB monetary easing, or speculation in that regard, to weigh on the euro in the months ahead.

Middle and Far Eastern reserve managers continue to rotate out of dollars and into euros but this theme is waning somewhat. We hold a very firm outlook for the USD in 2013 and if we are correct, as we have been so far this year, there is a high probability that this will result in a weaker euro in H2 2013. The 8.50-8.65 range has held for the past month but we prefer the lower end of this range, with potential upside considered quite limited. Range-trading around the 8.50 level looks a decent bet for the next 2-3 months before paying another visit to the 8.30-8.35 trough that was established at the end of Q1. Neither currencies look attractive in the current environment but we believe the euro’s downside risks are greater.

Richard Driver
Foreign Exchange Analyst

Caxton FX

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Eurozone growth data comes back to haunt the euro

Data this morning has confirmed that the eurozone remains very much in recession. We knew that this was the case, but we didn’t know quite conditions were quite this bad. In the final three months of 2012, the French economy contracted by 0.3%, Germany’s by 0.6% and Italy’s by 0.9%, with all three GDP figures coming in worse than market expectations. The euro weakened on all of these data releases. Perhaps surprisingly, given that the market had the above figures already out in the open, the euro also weakened as a result of the overall eurozone GDP figure, which revealed a 0.6% contraction. Meanwhile, Portugal also posted a 1.8% contraction, while the Netherlands shrank by 0.2%. Spain we know contracted by 0.7%. Suddenly the UK’s Q4 GDP figure of -0.3% doesn't seem quite so disastrous. 

The market has been content to ignore weak eurozone data in recent months and as a result the euro has had an easy ride. Super Mario (Draghi) said he would do whatever it takes to keep the euro afloat, Greece managed to kick the can further down the road, and bond yields have been brought under control. All is well? All is not well - these eurozone figures are a reality check and really bring home what the market has seemingly been willing to sweep under the carpet. 

Perhaps the market is not ignoring it and perhaps they are looking beyond at a recovery in 2014, basking in the relief that the debt crisis no longer threatens the very existence of the euro. Either way, if data like today's continues to filter through in 2013 without significant improvement, then the ECB will be forced to act by cutting interest rates and you can be sure that the market will sit up and take notice when that happens. Germany has posted some encouraging figures so far in 2013 but it is anything but plain sailing for the euro from here.

The strong eurozone exchange rate over the past few months will surely have contributed to these awful eurozone GDP figures. The ECB remains reluctant to intervene to weaken the euro but they will have limits to what sorts of levels they are willing to tolerate. This is a key factor behind EUR/USD’s stalling ahead of $1.40. Next up, the Italian elections - expect the nerves to continue jangling over the next week or so. 

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

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