Caxton FX Weekly Outlook: UK GDP needs to be firm

Sterling kept out in the cold despite host of strong UK figures

It was a good news week as far as the UK economy was concerned last week. We saw some more positive UK labour data; the unemployment rate dropped 7.9%, which is the lowest seen in over a year. Meanwhile, there were four thousand less jobless claimants; the improvements being seen in the domestic labour market are being sustained far beyond what many had expected.

UK retail sales data was also stronger than expected last week, while the public sector net borrowing figure also revealed that the government borrowed the least in the month of September since 2008. The chances are that Osborne will still miss his deficit-reduction targets but things appear not to be as bad as once feared.

Another development last week, which should have been positive for the pound, was a rather less dovish MPC minutes than expected. There appears to be a clear dovish voice within the MPC, led by David Miles, but there is no doubt that there are plenty in the nine-member committee who doubt that the UK economy needs a further dose of quantitative easing. Better still for the pound was the skepticism of some MPC members that more QE would actually be of any real practical benefit. Mervyn King speaks this evening and will perhaps provide some further clues. UK inflation has dropped to almost a three-year low, which is not exactly supportive of the pound but it was quite surprising to see the market ignore last week’s slew of genuinely upbeat economic figures. This week brings the long-awaited preliminary UK GDP figure for the third quarter; a showing of 0.6% is the consensus expectation, which should give the pound some belated support.

EU Summit hardly set the market on fire

It won’t come as much of a shock to learn that last week’s EU Summit yielded little by way of ground-breaking progress on the eurozone’s various debt issues. Merkel even said herself that this wasn’t a Summit where decisions would be made, rather it would pave the way for decisions to be made in December. Headlines focused around the banking union, which is expected to come into being at some point next year, but there was little to get excited about. Market nerves continue to ease though, as demonstrated by declines in Spanish bond yields, despite the fact that we remain in the dark with respect to the timing of bailout request from PM Rajoy.

There is plenty of eurozone growth data to keep an eye on this week, with investors possibly most concerned with conditions in Germany. A key gauge of the German business climate was surprisingly weak last time around and Wednesday morning should shed further light on this issue.

The euro has made a soft start to Tuesday’s session; Greece has stated that a deal must be reached on a €13.5bn package of cuts by Wednesday night, while Moody’s has downgraded five Spanish banks. This has helped sterling climb half a cent above its 5 ½ month lows of €1.2250. EUR/USD has also fallen to $1.30, which should see plenty of euro-buyers return in the short-term.

Sterling has lost grip of the $1.60 level this morning, a development we have anticipated for a while, though we have had to be patient. It now trades at a six week low of $1.5990 and direction from here all depends on what happens to the EUR/USD pair. Our base line scenario is for further losses for both pairs this week.  

End of week forecast

GBP / EUR	1.2325
GBP / USD	1.5975
EUR / USD	1.2950
GBP / AUD	1.5675
Richard Driver Currency Analyst Caxton FX

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

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

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

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

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

Big week of UK announcements ahead 

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

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

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

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

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

Richard Driver
Currency Analyst
Caxton FX

Caxton FX Weekly Round-up: Euro takes a hammering

ECB cuts rates and the euro takes some punishment

The ECB met expectations last week by cutting the eurozone interest rate to 0.75%. In addition, the deposit rate was cut to zero. This all makes the euro the second-lowest yielding currency in the market after the swiss franc, which is likely to see investors increase their use of the euro as a funding currency for carry trades into higher-yielding currencies. This should be a major factor weighing on the euro moving forward.

For many, the ECB’s rate cut did not go far enough in offering support to the eurozone’s deteriorating situation. There is a significant chance of another interest rate cut at the ECB’s next meeting in August, as there is of alternative easing measures such as another LTRO (cheap loan offering).

The post-EU Summit optimism has well and truly run its course and the market sentiment has once again turned negative. Spanish bond yields are back up at 7.0%, while global equities have tumbled for three days straight. Eurozone investor sentiment data was very poor on Monday morning and with the market already reflecting on recent weak data from the US, Japan and China, the euro has come under some pressure.

It is not all bad news for the euro, however, as we have heard today that Spain will be granted a year’s grace until 2014 to meet its deficit target of 3%. This has been insufficient to trigger any major euro bounce, which is sitting close to 3 ½ year lows against the pound and 2 year lows against the USD.

US data spooks market and risk aversion takes hold

The key monthly figure from the US labour market disappointed last Friday. It is always interesting to see how the US dollar reacts to weak domestic data and Friday’s installment proved supportive of the greenback. Dollar-friendly risk aversion was the knee jerk response, despite the fact that the downtrend in US data is likely to push the US Federal Reserve into finally pulling the trigger with regard to QE3 later this year. There is a chance that the Fed will do so on August 1st and much depends on US data in the intervening period, but we suspect Ben Bernanke & Co will choose to keep their powder dry for another month at least.

The flight to the safety of the US dollar has seen GBP/USD lose some ground in the past few sessions. The Bank of England’s decision to inject another £50B of quantitative easing into the UK’s flat lining economy was broadly priced in, though last week’s poor growth figures from the UK’s construction and services sectors in particular were not helpful for GBP. The week ahead is fairly quiet in terms of domestic data, with only manufacturing production data and trade balance data likely to receive much attention.

EUR/USD was last week’s major mover, having tumbled from above $1.26 to below $1.23 in the space of just three sessions. We have been calling for a slide down towards and below $1.20 and this latest euro sell-off has only strengthened our resolve. GBP/USD fell as well, but not by as much (it fell from $1.57 to $1.55). This cleared the way for GBP/EUR to help itself to some easy gains up above €1.26. These are clearly strong levels at which to buy the euro in the short-term, though in the longer-term we target levels even higher in the direction of €1.30.

The market will look to the meeting of EU finance ministers over the next two days for a decision to activate the buying of peripheral EU debt but as ever there remains plenty of scope for disappointment here.

End of week forecast
GBP / EUR 1.2625
GBP / USD 1.5475
EUR / USD 1.2250
GBP / AUD 1.53

Richard Driver

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

Euro rallies on EU Summit, but the positivity is already waning

EU Summit far exceeds market expectations, fuelling euro rally

Market confidence in the build-up to last week’s EU Summit was pretty much at rock bottom. Angela Merkel’s continued tough stance on eurobonds seemed to indicate a wider deadlock between Germany on one side and struggling eurozone nations such as France, Spain and Italy on the other.

In the early hours of Friday morning, EU chief Herman Van Rompuy announced several decisions which gave risk appetite and market sentiment a major boost. Two key questions left by the Spanish bank bailout deal were answered. First, the bailout funds will be able to directly recapitalize Spain’s banks, without adding to the debt-to-GDP ratio of Spain as a whole and forcing its borrowing costs up. Second, the bailout loans will not be given senior creditor status, easing concerns that private bondholders will not see their investments completely written off. In addition, pledges were made that the bailout funds will be able to invest in
distressed bonds directly, again relieving concerns around the Italian and Spanish bond markets.

Clearly the markets were impressed by these decisions and they certainly buy some more time but they don’t amount to a silver bullet solution to the debt crisis by any stretch of the imagination. We still lack any detail on the fundamental issue of longer-term fiscal union and whilst the bailout resources can be used more flexibly now, though its size remains inadequate.

ECB and BoE both set to make moves this week

ECB Chief Economist Peter Praet stated recently that “there is no doctrine that interest rates cannot fall below 1 percent.” Comments such as these lead us to believe that the ECB is set to cut its already record-low 1.00% interest rate to 0.75%. There is a significant risk that the ECB will cut rates to 0.50%, in light of weak eurozone growth data and fading inflationary risks. Whilst the market is likely to be grateful that the ECB is taking action, the reduction in the euro’s interest rate differential is likely to be a negative for the single currency in the longer-term.

We expect the Bank of England to introduce further quantitative easing on Thursday, in light of the distinctly dovish tone within last month’s MPC minutes and the four votes in favour of QE that they revealed. Only one more dovish voter is required for a majority in favour of QE and we believe this will come on Thursday. The move looks to be fully priced in though, so sterling has already taken the pain in relation to this move. Wednesday’s UK services figure will be watched closely on Wednesday, a slowdown is expected.

The dollar has suffered a significant sell-off amid booming risk appetite in the aftermath of the EU Summit. We maintain a bullish outlook for the US dollar moving forward, although the week ahead brings with it significant risks. Friday’s US non-farm payroll is expected to show a mild improvement but amid the softness in US growth data of late it would be no surprise to see the result undershoot expectations.

The euro’s rally has already run out of steam; GBP/EUR is trading up above €1.2450 and EUR/USD’s has pared back from $1.27 to below $1.26. We continue to target levels well above €1.25 for sterling. A further decline in the EUR/USD pair will surely weigh on GBP/USD, which is coming up against stiff resistance around $1.57.

End of week forecast
GBP / EUR 1.2550
GBP / USD 1.54
EUR / USD 1.2475
GBP / AUD 1.57

Richard Driver

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

Weekly Round-Up: UK economy picks up, Greece stalls

Greek issue drags on…and on

The euro is holding up remarkably well given the weight of concern that is surrounding Greece and indeed Portugal. Last Monday’s (30th Jan) EU Summit saw Germany’s deficit control proposals finalized and the official scheduling of the €500bn permanent bailout fund’s (the EFSF) introduction for July this year. Positive steps but hardly game-changers.

The issue that continues to obsess the financial markets is Greece. Talks over private sector involvement in a Greek debt swap, which will involve significant write downs on investor holdings of Greek debt, have been the primary focus of the markets for some time now. Agreement is required for Greece to receive the €130bn it needs to avoid default in March. Time and again we have been assured a deal was imminent, but deadlines have been repeatedly been missed and negotiations are ongoing. On balance, there is probably a feeling that a deal will be reached in the end, which will avoid a Greek default for now. However, we are not anticipating a major euro relief rally on the back of any positive announcement.

This is explained by the issues that remain even if a Greek default is averted. Portugal is clearly next in the firing line; Portuguese bond yields reaching fresh record highs is evidence of this. Rating agency Fitch added to the pressure in the bond markets by downgrading several eurozone states last week, including heavyweights Spain and Italy. The euro has actually made a strong start to the year, largely as a result of short-covering, but we maintain a bearish view on the single unit.

UK growth figures raise hope of U-shaped recovery

Last week’s UK PMI figures were broadly very encouraging; the services sector grew at its fastest pace in ten months, whilst the manufacturing sector bounced back into positive growth. The UK construction sector posted another poor figure, but the data as a whole represents a source of hope that Britain can avoid a double-dip recession. This week’s manufacturing and industrial production figures are also expected to return to growth.

This will all be insufficient to dissuade the Bank of England from introducing further monetary easing to the UK economy at Thursday’s meeting (in the form of further QE). However, it should be enough to convince Mervyn King & Co to add £50bn rather than £75bn of QE, which should reduce the downside risks to sterling. The ECB also meet on Thursday and it could well cut its 1.00% interest rate by a further 0.25%, though they may choose to wait a further month.

US recovery continues to impress

Economic figures out of the US economy are on a clear uptrend at present. This was evidenced most importantly by the key monthly labour market update, which revealed 243 thousand jobs were added to payrolls (the most in nine months). Risk appetite away from the US dollar increased as a result of the announcement, but has since been hemmed in by growing frustrations surrounding Greece.

Sterling is trading at 1.2050 against the euro, in the middle of a range that has persisted throughout the start of this year and should continue to do so over the coming sessions. Trading up at $1.58, sterling is performing excellently against the US dollar and may keep on climbing for now, but is due a pullback soon.

End of week forecast
GBP / EUR 1.2025
GBP / USD 1.5850
EUR / USD 1.3180
GBP / AUD 1.46

Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.

Investors finally punishing the euro

Euro suffers heavy losses

The euro suffered heavy losses last week as the markets set about pricing in a lack of any real or satisfactory progress at the Dec 9th EU Summit, and the near certainty that 2012 will be another very rocky year for the single unit. Eurozone downgrades are currently the number one driver of market fears at present. Moody’s has cut Belgium’s rating, Fitch has asserted that a comprehensive solution to the debt problem is “technically and politically beyond reach” and has proceeded to place major eurozone nations such as Italy and Spain on a negative watch. Action from Standard &Poor’s seems highly likely before long and it could well be France’s triple-A rating in the firing line.

The euro is trading at an eleven-month low against the pound and the US dollar. Eurozone bond yields remain under pressure, the markets are clearly frustrated and it is quite clear that the rating agencies are too. In this environment, we see the euro making a difficult start to 2012.

Eurozone finance ministers agreed yesterday to bolster the IMF’s resources by €150bn. The market will always welcome greater commitment to support the eurozone’s struggling nations by increasing available aid, but with the decisions contingent upon the parliamentary approval of individual member states, the euro has failed to gain as a result. Besides in reality, €150bn does little to change the complexion of the eurozone crisis.

UK data disappoint further, but sterling unperturbed

Last week’s UK growth figures added to an already gloomy economic picture. UK unemployment is now at a fresh 17-year high and retail sales contracted by 0.4% in November. Still, sterling was largely unaffected by these figures.

Rating agency action n the UK’s triple-A status is the key risk as far as sterling is concerned. The market has come to terms with low growth and high debt in the UK, but if these two factors worsen sufficiently to prompt rating agencies to downgrade UK debt, then sterling could well lose the quasi-haven status it has been benefiting from in the past few months. If UK gilts lose their appeal, then so too will sterling to a certain extent.

The MPC minutes are released this Wednesday, and expectations surrounding it are fairly muted. The MPC will remain in wait-and-see mode until it steps up it QE programme in February and there are not too many talking points besides the UK economy’s uncertain outlook.

Sterling is trading at €1.1950 and €1.20 before the year’s end is by no means out of reach. Against the US dollar, again sterling is looking decidedly more vulnerable but having climbed up towards $1.57 today, is actually holding up pretty well in what are distinctly risk averse trading conditions. The euro is desperately holding on to the $1.30 level but we continue to favour the safety of the US dollar, particularly with S&P liable to make their voice heard in coming sessions.


End of week forecast
GBP / EUR 1.1975
GBP / USD 1.56
EUR / USD 1.3025
GBP / AUD 1.57

Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.

Weekly Round-Up: Markets are punishing the euro

EU Summit fails to satisfy the market

Movements in the exchange rates yesterday indicated a clear dissatisfaction with the decisions (or lack thereof) made at last Friday’s ‘crunch’ EU Summit. Various commitments were made, notably in the form of a new fiscal compact that will usher in tighter budget deficit rules. This will guard against future sovereign debt crises cropping up in the future, but it doesn’t do a great deal to solve, or ease concerns surrounding the current and worsening eurozone debt crisis. The European Stability Mechanism (the permanent bailout fund) will be activated a year early in mid-2012 – another longer-term measure. A further €200bn of aid will also be made available – positive but hardly the sort of ‘bazooka’ style measure that has been mooted of late.

The European Central Bank has refused to step up its bond-buying and Italian bond yields have risen as a result. This reveals what the market thinks of the decisions made at last week’s Summit. Moody’s has joined fellow ratings agency Standard & Poor’s in warning of possible eurozone debt downgrades. Moody’s cited “an absence of decisive policy measures.” Decisive is the operative word here and the adjective that continues to elude EU leaders. With all three of the major rating agencies posturing, further eurozone downgrades are looking likely - the euro appears more vulnerable than ever.

The euro guarded against losses in the immediate wake of the EU Summit, but it has made a terrible start to this week. The market has had to come to terms with, and is pricing in, the fact that this eurozone crisis is going to roll on for months to come. This should not come as too much of a surprise, but expectations of ground-breaking progress really had reached new levels in the past fortnight. Accordingly, GBP/EUR has posted new nine-and-half month highs up towards €1.1850, and the euro has crashed towards fresh lows towards 1.3150 against the US dollar. The euro has fallen and fallen hard, and our pessimistic view of EU political stalling is finally being reflected in the exchange rates. In addition to the headline fiscal issues plaguing the euro, data this week is likely to highlight the economic issues the eurozone is facing. Eurozone manufacturing and services data is likely to stoke prevailing fears of another eurozone recession on Thursday.

Sentiment towards the US economy improving

Away from the furore surrounding the EU Summit, US consumer sentiment data hit a six-month high on Friday, providing further indication that the slowdown we have seen across the Atlantic for much of this autumn may well just be temporary. Caution will persist however, particularly with US retail sales figures disappointing today.

The picture is gloomier here in the UK; employment (Wednesday) and retail sales data (Thursday) provides plenty of scope for some sterling negativity as the week progresses.

Sterling is trading impressively above €1.18, and the euro looks hard-pushed to rebound in the current low-confidence environment. Key options levels at $1.3250 on the EUR/USD pair have now given way and safer currencies such as sterling and the US dollar have made an excellent start to the week. We can expect there to be further volatility this week and it certainly won’t be one-way, but we do expect the current risk-off climate to favour safer currencies and punish the euro. Currently trading at $1.56, sterling has held up pretty well against the US dollar, but a heavy EUR/USD pair should limit any upward sterling moves.

End of week forecast:
GBP / EUR 1.1850
GBP / USD 1.5550
EUR / USD 1.3125
GBP / AUD 1.5450

Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.

EU leaders sidestep eurozone growth issue

So the euro has made some monster gains this month, first as a result of hopes and speculation of major action on some key eurozone debt issues, which were then built upon when EU leaders finally delivered the goods. Bailout fund enlargement, recapitalisation, Greek haircuts – some major decisions were made (though a whole world of detail remains yet to be negotiated). But what about another key issue that was cited as a priority in the build up to the EU Summit- eurozone growth.

Weak growth is plaguing the eurozone periphery; the austerity programmes in countries like Greece, Spain, and the ones that will soon be implemented in Italy are strangling any sort of economic expansion. Perhaps even more alarmingly, growth in the core nations of France and Germany has also slowed down considerably, leaving a dip back into a full eurozone recession a strong possibility.

Without plans for economic growth, the peripheral states will be unable to meet their austerity targets, and again they will come under heightened pressure in the bond markets. One way EU officials can help eurozone growth is through cutting interest rates. The ECB has been looking to hike throughout 2011, the eurozone base rate has risen from 1.00% to 1.50% to curb rising inflation. This has triggered gains in the strength of the single currency which has hurt the periphery further.

Incoming ECB President Mario Draghi will be chairing his first meeting next week, with Trichet having finished his tenure this month. It is not beyond the realms of possibility that he will respond to the downturn in regional growth by cutting interest rates and relieving some pressure. With inflation up at 3.0%, the ECB may be wary, and recent data actually showed that money supply growth accelerated in September. The markets are anticipating a 0.25% rate cut by the end of the year. Perhaps the periphery will have to wait until December for some respite.

The growth issue will come up again and again in coming months and years. It was clearly sidestepped at Wednesday’s EU summit, but the markets will force EU leaders to revisit it.

Richard Driver
Analyst – Caxton FX

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So how will the market respond to today’s eurozone plans?

Today’s EU Summit will be covering a range of issues, top of the list are the recapitalisation of Europe’s banks, the expansion of the EFSF (bailout fund) and the haircuts to be imposed on Greek debt. The meeting has been the sole focus of the market for the past fortnight.

There was already disappointing news yesterday that a meeting between EU finance ministers scheduled today has been cancelled due to a lack of agreement, though the main meeting between EU leaders is set to go ahead. Expectations for progress have been heightened; market confidence in EU leadership remains palpably lifted it seems. Though all the tell-tale signs of delay and disagreement point to the strong possibility of a fudged and inadequate compromise being delivered today.

It would be surprising if the EU Summit failed to deliver something that represented a decent attempt at “comprehensive package.” Many will be betting that the euro stands to benefit from any signs of genuine progress on the eurozone’s severe economic and fiscal woes. However, we are betting that the euro will suffer a slide. First, there is a strong chance that the package could fail to meet market expectations. Second, the package could be impressive, but the market may well take “buy the rumour, sell the fact” approach and choose to take profit on the euro’s gains this month.

We know one thing for sure, today’s EU Summit will leave plenty of details to be ironed out, plenty of obstacles to be overcome, and plenty of issues unresolved. These are factors that could see the euro sell-off in the immediate aftermath of tomorrow’s Summit, or alternatively once the dust settles. Either way, the euro looks a little strong at €1.15 and $1.39 and we are looking for a downward correction for the euro.

Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.

Ongoing cause for eurozone concern but sterling/euro levels set to remain until April 7th

In the wake of the EU Summit last week, and further eurozone developments over the weekend, now is a good time to discuss how on earth the euro can be performing so strongly and how long we can expect this continue.

At present the euro is trading at a five-month high against sterling, and is continuing to hold above the key $1.40 level against the US dollar, just 1.4% from its recent high reached early last week. This strong performance has seen the single currency shake off a series of peripheral debt and bank downgrades, record-high Portuguese bond yields on the back of the country’s government collapse, and ongoing concerns over the region’s bailout fund.

Why such resilience? The key attraction to the euro is that the ECB is due to raise its base interest rate on April 7th, well ahead of a June (at the earliest) BoE rate rise and an expected 2012 Fed rate rise. In addition, the euro is continuing to benefit from solid Eastern sovereign commitment to diversify reserves via the euro. For the time being the markets appear confident that the German and French economies are strong enough to pull the eurozone through the worst-case scenarios in the periphery. Ahead of April 7th, we doubt that the single currency will come under any prolonged pressure. However, it could well prove to be a turning point.

Following the ECB rate rise, the market may refocus its attention on Portugal and the lack of progress being made towards an underlying resolution. The EU Summit was marked as a deadline for the eurozone bailout issue, but this decision has now been delayed until June. Market disappointment was actually muted to this delay but frustration could yet re-emerge. In addition, over the weekend German Chancellor Angela Merkel lost another key regional election; if this is repeated and the markets lose confidence in German political resolve to spearhead eurozone debt aid, then much of the single currency’s recent appreciation could be ceded.

We are still sterling-positive on a longer-term view, though recent UK economic data may delay improvements in the rate.

As for the US dollar, a change in rhetoric from the Fed in response to higher-than-expected fourth quarter economic growth may have improved the currency’s outlook. It was indicated that the Fed will definitely be ending QE2 in June (and perhaps earlier…), though no indications have been made as to an earlier-than-expected Fed rate rise. Unless a Fed rate rise is brought forward to this year, we do not foresee a strong dollar performance even with an increasingly positive US economic outlook.

Richard Driver
Analyst – Caxton FX


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A tough week for sterling fizzles out quietly, what’s coming next week?

After hopes for an early rate hike were raised by UK inflation levels at 4.4%, sterling has proceeded in the past four days to drop by 2% against the US dollar. Against the euro the pound has dropped by 1.6% to a five- month low. An unchanged voting pattern and dovish tones within the MPC’s minutes; a downward revision of projected UK GDP for 2011 (thank you Mr. Osborne); a threat of a UK rating cut, and some woeful retail sales figures all conspired to ensure sterling’s slide this week.

We remain optimistic that sterling’s fortunes will improve in coming months but for the next week at least the elusive catalyst to turn things around remains unseen. We might have thought that disappointing news from the EU Summit or the multitude of credit downgrades within the eurozone may have soured sentiment toward the euro. However, the resilience to the peripheral debt problems that we are seeing from sovereign buyers in the Middle and Far East makes us confident that euro strength is here to stay at least until April 7th.

This date will surely see the ECB raise interest rates, offering investors a higher yield compared to both the BoE and Fed, where rates are still a record lows. However once this date passes, this major appeal from which the euro has benefitted so much in recent weeks may well be consigned to the past, opening the door for some sterling improvements.

The best opportunity for the UK to gain a foothold next week comes on Friday, when UK manufacturing PMI figures are released. Nothing spectacular is forecast so sterling could well struggle to regain ground lost. Next week also brings US Non-Farm employment results, which as usual will have a big influence on risk appetite by clarifying the health of the world’s largest economy.

In the meantime, England fans remain grateful to Gareth Bale for pulling his hamstring.

Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.

MPC Minutes dishearten investors but high hopes for change were misplaced

After a long time out of the spotlight, the UK again took prominence today as the minutes from the MPC’s March meeting were released this morning. In addition, we saw Chancellor George Osborne announce the UK’s 2011 budget earlier today. The former caught the eye but the latter left the market unperturbed.

Central bank interest rates are the real market-mover at present and an insight into policymakers’ views will always attract attention. The minutes revealed that Andrew Sentance’s hawkish camp failed to coax a fourth MPC member to join their campaign to increase interest rates. Had they succeeded in this, the outlook for a BoE rate rise as early as May would have been greatly improved, particularly in light of yesterday’s appalling UK inflation figures (4.4%!).

On release of the news, sterling dropped sharply across the board, and investors may well have been disappointed by the lack of any real increase in hawkish language adopted within the minutes. Indeed if anything, the tone reflected additional uncertainty following recent global developments, which will likely cloud the UK’s economic outlook.

Osborne’s budget announcement today contained a wide range of interesting material; the headline was probably Osborne’s downward revision of the UK’s growth forecast for 2011 to 1.7% (from 2.1% - itself an already downwardly revised estimate) but sterling has survived this hit relatively unscathed.

Sterling has actually lost little ground to the euro today as some bad news from the eurozone irritated the markets. It has been announced that the EU Summit this weekend will not be reaching a final decision on the ever-troublesome bailout fund. Given that the markets had grown in enthusiasm after initial progress at a preliminary summit, and that they would get a definitive answer this Friday, the delay of the decision until June seems to have frustrated euro-investors. Concerns have also mounted with regard to the Portuguese Parliament’s vote on its government’s austerity measures, which if rejected will almost certainly see its PM resign, and could well be the catalyst for a Portuguese bailout.

At present, sterling remains in limbo around €1.15 with another trigger needed to define direction.

Richard Driver
Analyst – Caxton FX


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Crunch Time: EU Summit

Next Friday’s EU Summit marks a self-imposed deadline for eurozone leaders to reach an agreement on a “comprehensive package” to deal with the region’s fiscal problems. Progress was made earlier than expected at the preliminary Summit last weekend, and the markets responded positively – perhaps too positively if Trichet’s recent pessimistic comments are anything to go by.

Most significantly, EU leaders reached an agreement to expand the European Financial Stability Fund (EFSF). However, the more realistic tones coming out of the Summit are stressing that “the devil is in the detail” and whilst broad principles were agreed, the financial technicalities involved in actually implementing those principles pose a huge obstacle to concrete commitments.

Certainly, the enlarged bailout fund is a step in the right direction but it is more difficult for the EU member states to agree in what proportions they should contribute. One would assume larger states such as France and Germany would shoulder the burden but their national publics are growing tired of this ‘duty.’ Another issue surrounds the continuation of the ECB’s bond-buying role instead of allowing the EFSF to buy bonds on the secondary market, which Trichet feels particularly aggrieved about. Superseding all of this is the fact that the EFSF is set to expire in 2013, with the European Stability Mechanism to replace it, so agreement on the shape of this longer-term fund is paramount next week.

Coming into this month, the markets were cynical as to progress on EU debt issues. However, with Trichet turning up the heat on EU leaders (indicating borrowing costs would be increased in April with an ECB interest rate hike) we saw greater political commitment last weekend and increased market confidence followed. The euro has strengthened against the US dollar and sterling accordingly, despite several recent peripheral credit downgrades and very high bond yields.

It is possible that agreement on a “comprehensive package” next week will trigger a strong euro rally next week, persuading the markets that the eurozone debt problem can finally be put to rest. More likely though, in this risk adverse environment, is that the markets will greet an agreement positively but remain broadly cautious on the euro. Any gains will be incremental as markets await further proof that the situations in Portugal, Spain and Greece will improve. Sterling is likely to suffer against the single currency if the Summit is successful, at least in the short term, given that the ECB is almost certain to raise interest rates before the BoE. However, the pound should continue to outperform the US dollar, tracking euro strength.

Richard Driver
Analyst – Caxton FX


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Market Volatility Explained

The beginning of 2011 has thrown up a series of major market-moving events and we thought it’d be useful to take a closer look at the extent to which localised unrest and disasters can send shockwaves through the currency markets, and why. After all, how many of you would expect that the Norwegian Kroner will directly benefit from social uprisings in Bahrain? (Norway is a major oil producer, Middle Eastern tensions push oil prices up, Norway profits.)

Whilst the currency markets are more volatile than, for example the equity markets, in calmer times even currency movements can be relatively predictable. When the market spotlight is focused on economic fundamentals, data announcements have a direct impact and exchange rates are more faithful to trends. In early 2011, we saw sentiment governed by interest rate speculation and sterling benefited accordingly whilst the greenback suffered.

However, such factors are of little relevance to investors during times of uncertainty. Most recently the Japanese crisis, but before this the natural disasters in Australia and New Zealand, and unrest throughout the Middle East and North Africa, place traditional economic factors on the backburner. Long-term investors flee to the safety of currencies such as the Swiss franc, the US dollar and the Japanese yen. Short-term investors, or “speculators,” react so quickly to events that their movement is as unpredictable as the freak occurrences on which they base their currency “bets.”

Using the Swiss franc as an example, market volatility surrounding natural disasters is clearly visible in the context of the Japanese earthquake/tsunami/nuclear crisis, and is clearly visible. The “swissie” climbed 6 cents against the Australian dollar from 1.06 to 1.12 in the space of 3 days, having hovered around the 1.06 mark for the preceding three weeks. Investors abandon calculated risks on currencies such as the aussie, euro and sterling, and revert back to safety in such uncertain times leading to sharp appreciation of “safer” currencies such as the Swiss franc.

We can be confident that these times of heightened volatility will prove temporary. As events stabilise in states such as Bahrain and Japan the market’s will begin to calm down and factors such as interest rate differentials and growth potential will return to focus, bringing with them more predictable currency investments. However, amid soaring debt levels in eurozone peripheral countries, there may yet be another crisis round the corner unless the EU can reach a firm agreement at their Summit meeting next week.

Richard Driver
Analyst – Caxton FX


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UK interest rates left unchanged - expect a rise in June

It is no secret that central bank interest rates represent the main driver of the foreign exchange market at present. So why isn’t today’s monthly UK interest rate announcement an exciting one? Well, because we knew that the 0.5% rate would be maintained, as it has been every month for the past two years.
UK inflationary pressures are soaring at double the BoE’s target and given the ECB’s recent hawkish indication of an April rate hike, there has been growing demand for the MPC to take similar action to tighten policy. However, the BoE is wary of destabilising the economic recovery at this stage and we don’t see rates changing until June. Nor should they; we really need to wait until June to know what impact the UK’s austerity measures will have on British growth.

However, it will be interesting to see what the minutes of the MPC reveal. At last month’s MPC meeting, resident hawks Andrew Sentance and Martin Weale recruited Spencer Dale to their cause, but remained outnumbered by 6:3. We may see a fourth vote added in favour of a rate rise this month, but we still don’t envisage the BoE raising rates before June - by which time there should be firmer evidence that economic conditions are improving.

Given that the MPC was expected to maintain rates, we have seen a somewhat surprising drop in value for sterling, falling by over a cent against the dollar to its lowest point in almost a fortnight. However, the focus for the market will now turn on the EU summit this weekend, where officials will attempt to work towards an agreement on the eurozone’s fiscal troubles. After a week where the euro has suffered somewhat against its major counterparts on the back of flare-ups in Greece, Portugal and now Spain, the single currency would benefit hugely from some progress on the peripheral debt issue.

Richard Driver
Analyst – Caxton FX
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