Fed rate hike in Spring 2015?

Yellen kick started her term as Fed Chair surprising the markets as more of a hawk instead of dove. As expected the Fed continued with winding down asset purchases by $10 but what was unforeseen was the revision to the median forecast of the Fed’s fund rate, from 0.75% to 1% by the end of 2015. More importantly  Yellen’s response to a question about what “considerable” meant in the Fed statement which claimed rates would remain low “for a considerable time”, really caught the market of guard. “Something on the order of around six months, or that type of thing” was her response, which suggests that we could see tightening of policy by spring 2015- far sooner than thought.

The market was under the impression interest rates will remain low through the majority of 2015, but Yellen’s comments imply we could see higher rates around the same time as expected from the BoE. Cable (GBPUSD) fell on the back of these comments, and with the prospect of a rate hike in the first half of 2015 now in play and QE tapering already underway, the slide in cable may finally begin to take hold.

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

March 2014 Currency Report: Eurozone inflation eases pressure on ECB

Sterling has remained in favour over the last month although it has lost a little ground. GBP/EUR is still trading above 1.21 whilst levels in cable remain elevated above the 1.67 mark. The BoE Inflation Report was released and the upward revisions in UK growth triggered aggressive sterling buying as optimism about the prospect of a rate hike increased. This month developments in the UK economic climate will be watched
closely especially considering recent concern that growth is slowing.

It is the same story again this month with focus primarily on eurozone inflation and the next move from the ECB. Data last month was not particularly impressive, but GDP figures at least pointed towards a slightly brighter outlook for the euro area. There is still talk circulating about the possibility of negative positive rates and this will be a key discussion ahead of the policy announcement.

The Fed tapering debate continues to be at the forefront of things and now the discussion is surrounding whether the Fed will continue to pull back purchases at the pace of $10bn a month or pick up speed. Economic figures from the US haven’t been particularly impressive over the last month especially the last two payroll readings; another disappointing number this Friday could result in some severe dollar selling.

Pound still in favour, but for how long

Demand for sterling hasn’t faded just yet and some of this is due to orders in relation to the Verizon and Vodafone merger. Other factors underpinning the pounds resilience is the on-going speculation regarding the path of UK interest rates. Although the central bank have consistently reinforced the fact that rates will remain low for a while yet, expectations that policy could tighten in the first half of 2015 have kept the currency competitive. Forward guidance is now based on broader measures with the focus of the MPC on reducing slack and increasing productivity. Comments from monetary policy committee members such as BoE member Weale have encouraged speculation by claiming the bank rate could rise even sooner if wage growth rises more quickly. The revised UK GDP figure confirmed the initial reading of 0.7% q/q growth but what was particularly encouraging was the contribution from business investment and exports. The BoE have highlighted the need for a pickup in business investment to help spur productivity growth, and this figure suggests that the recovery is broadening. As a result we expect sterling bulls will be comforted by this. The pounds performance this month will be partly dependent on whether data releases can keep the optimism brewing. Recently there has been some concern that growth in the UK is slowing and although the second GDP estimate was in line with expectations, PMI data this week will need to impress in order to keep demand for sterling strong. Wage growth in particular will be scrutinized considering the implications this has for monetary policy.

GBP/EUR

Will the ECB act?

Eurozone inflation data was released last week and this has resulted in some repositioning in both the GBPEUR and EUR/ USD rate. A lot of the reasoning behind the euro’s vulnerability has been the uncertainty behind what is to come next from the ECB. Recent data has not been disastrous as GDP data showed the French economy finally returned to growth in the fourth quarter. PMI figures on the other hand were not as positive but what cannot be denied is the progress being made by the euro area.

The reading of 0.8% y/y inflation can be considered a relief if we take into account the potential effect of a dip lower to 0.6%y/y. This would have definitely increased the pressure on the ECB to act. At least for now, the central bank has more room to assess the medium to long term outlook for inflation before deploying their monetary tools. There is still a lack of clarity about what tools in particular the ECB will choose when and if the time comes to act against deflation. Talks of negative deposit rates resurfaced last month and only temporarily weakened the euro. This highlights the uncertainty surrounding the issue and we expect the market to listen out for further clues as to what weapon is the central bank’s first choice.

GBP/USD

Third time lucky?
The past two US nonfarm payroll readings have been disappointing, and adverse weather has been blamed for the poor results. It was hard enough to get the market to swallow that reasoning after the last figure was released, but another weather excuse for this month’s reading won’t wash too well with investors. Other economic figures haven’t been particularly impressive either, as some were also affected by the climate. This month the market needs to see some solid numbers, especially if the Fed is to continue to withdraw their asset purchases.

Fed Chair Janet Yellen testified before the Senate Banking Committee last week and this gave the dollar some support. Taking into account Yellen is considered a dove, her remarks regarding the direction for monetary policy suggested that the recent developments will not result in a halt in the Fed’s tapering plan. The key focus for the market this month will be the decision by the FOMC when they meet mid month. The
statement will provide further clues about the committee’s current stance and attitude toward the pace of tapering. We expect the FOMC to continue reducing purchases by $10bn for now.

GBP/EUR- 1.2170

GBP/USD- 1.66

EUR/USD- 1.37

Sasha Nugent

Currency Analyst

Caxton FX

Is the Chinese renminbi now a two way bet?

This week the fluctuation in the Chinese currency renminbi, had the markets worried as the appreciation that had been taking place over a number of years suddenly came to a halt. There were plenty of theories flooding the markets about why the currency and begun to weaken, even though the People’s Bank of China (PBOC) and Beijing had repeatedly made clear their intention to make the currency more volatile. As a result of the longer term trend, the gradual appreciation of the currency had encouraged investors to view the currency as a “one-way bet”, a trend that they were confident would continue.

It now seems that the PBOC have caught the market of guard in an attempt to fulfil their commitment to remove the renminbi's reputation as an effective one sided gamble. Traders now claim it is clear that the PBOC are intervening in order to guide the currency lower which in itself reminds us that the currency is quite a way off being freely floating. The central bank clearly still has the renminbi on a tight leash, adjusting its strength as it sees fit. However, at least this move achieved its goal of creating some volatility, and although we doubt the renminbi is a two way bet at the moment, creating a little uncertainty is certainly a step in the right direction.

Sasha Nugent

Currency Analyst

Caxton FX

Dollar performance may be limited if UK growth continues to surpass expectations

It wasn’t so long ago when the Fed signalled a wind down in asset purchases was on the horizon, and the BoE could only hope to shift towards more normal monetary policy. How times have changed, and although the Fed has managed to begin tapering, the delay and minimal monthly reduction has resulted in a reduced effect on the GBPUSD rate.

The UK made a surprisingly strong recovery in the second half of last year, and in particular the improvement in the labour market has spurred speculation about when the BoE will bite the gun and raise interest rates. Both economies are on the right track, however the last two non-farm payrolls figures have been disappointing and raised questions about whether the Fed could continue to cut back purchases by $10bn every month.

In her first testimony to the House Financial Services Committee, Fed Chair Janet Yellen acknowledged the development being made in the US economy, but also highlighted that there was still more work to be done and it is important to consider more than just the unemployment rate when “evaluating the condition of the US labour market". In the latest BoE Inflation Report, Governor Carney expressed a similar viewpoint, and despite raising growth forecasts, emphasized that the amount of slack in the economy is a big issue and other broader indicators will be needed to evaluate the economy’s progress. Forward guidance from both the Fed and BoE has indicated that rates will be held constant even after the unemployment thresholds have been breached.

The key difference in policy which may alter the performance of cable (GBPUSD) over the coming year will be the Fed’s decision to taper and hold rates vs the BoE’s decision to raise rates before cutting back on asset purchases. Initially, tapering was expected to have a larger effect on the strength of the dollar as the market viewed it as a tightening of policy. Ever since the UK economy picked up, and forward guidance created a benchmark to gauge the likelihood of rate hikes, the interest rate hawks have been fuelling a stronger pound. The prospect of a rate increase may be far more tempting than continued tapering, especially at a pace of $10bn per month. Although both central banks are trying to convince the markets that policy will remain accommodative, the Fed seems to have succeeded, whilst BoE has failed so far. The fact that the BoE’s initial projections for unemployment were badly timed has had a large effect on the credibility of its forecasts. This has allowed the market to go with its own estimates and continue to price in a rate increase in Q2 2015.

As long as UK growth continues to outperform, the possibility of a rate hike will increase limiting the dollar's potential. Disappointing US data will hurt the greenback, and with the market regarding Yellen as a dove, we doubt investors will hesitate to weaken the dollar further.

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

Caxton FX Weekly Report: Sterling takes control of the GBP/EUR and GBP/USD rates

Unemployment data set to keep the pound in charge

Sterling begins the week in a good position after UK retail sales allowed the pound to recover some losses incurred earlier on in the week. We may see the strength continue as spotlight hits unemployment data due on Wednesday. The UK labour market has continued to show improvement, and a report confirming an increase in city hiring, further supports the brighter picture. The Bank of England have already acknowledged the progress made in the unemployment rate, and any upside surprise here will bring the 7% unemployment target closer. The potential implications this has on future monetary policy should encourage a firmer pound, despite weaker inflationary pressures. The BoE monetary policy minutes also due to be released this week, should shed light on the central bank’s current stance towards tighter monetary policy. Although the need for higher interest rates has faded, a stronger recovery should create an economic environment that can withstand tighter credit conditions. This should keep the possibility for a rate increase in early 2015 alive. We expect the pound will be able to remain on the front foot against both the euro and dollar this week.

More problems for the ECB

The liquidity situation in the Eurozone is becoming an even bigger issue for the ECB, which has resulted in higher money market interest rates. The ECB are now under even more pressure to act against tightening (short-term) credit conditions. ECB President Mario Draghi has expressed the central bank’s commitment to

act against “unwarranted tightening of the short-term money markets”, and this suggests we may see some more action from the ECB sooner rather than later.

A number of key figures will be released this week including German ZEW Economic Sentiment and PMI data. As usual, the manufacturing and services PMI releases will be a focal point and any indication of an improvement in these sectors will be welcomed. It is unlikely that this will take precedence over UK unemployment figures, however, some strong numbers here could limit the potential upside in the GBP/EUR rate. It is a similar picture against the greenback, and we doubt there is enough momentum behind the euro to encourage significantly higher levels in EUR/USD.

A lighter calendar leaves the greenback open for vulnerability

The dollar has strengthened in these last few sessions, especially against the euro. Upside surprise in US figures have encouraged speculation that further cut backs in asset purchases is on the horizon and this should keep the greenback fairly supported in the days ahead. Lack of economic releases from the US leave
the window open for some weakness, and the main releases this week will be unemployment claims, existing home sales, and flash manufacturing PMI. After the last unemployment claims figure came in unexpectedly strong, another solid figure should increase demand for the dollar. With eurozone PMI figures due to be published earlier that day, any disappointing numbers could get the ball rolling for lower levels in EUR/USD, and good US figures should support the move further.
It has been more difficult for the dollar to advance against sterling, and with expectations that the UK labour market has continued to improve, we doubt the dollar will be able to make any significant gains against sterling this week.

End of week forecast

GBP / EUR	1.2175
GBP / USD	1.6370
EUR / USD	1.3500
GBP / AUD	1.8770

Sasha Nugent

Currency Analyst

Caxton FX

Finally the Fed reduces stimulus, but this failed to spark much reaction

After months of speculation regarding the likely timing of tapering, it finally came, with the Fed withdrawing $10bn in stimulus which is set to begin next month. Although not many economists predicted such a move, the announcement failed to trigger any significant movement, and both equities and emerging markets weathered the storm quite well.

The Fed has successfully convinced the market that tapering should not be confused with a tightening of policy. An adjustment to forward guidance reinforced this point, with the bank stating that loose monetary policy will remain, even after unemployment has reached 6.5%. A mere $10bn reduction in stimulus is hardly substantial and this may be part of the reason why equity and emerging markets appear unmoved by the news.

The day that the markets had been dreading seemed almost like a non event. Some might argue that this is a positive thing. We witnessed the effects taper talk had on the emerging market currencies with the Indian Rupee being one of the worst victims of a selloff. This suggests that all the speculation and the delay between September and December prepared the markets well for what was coming, unlike last summer when the markets were caught off guard.

Sasha Nugent

Currency Analyst

Caxton FX

The effects of a strong Aussie begin to show

For months now the RBA have highlighted their concern about a strong Australian dollar and we are now seeing the effect this is having on the Australian economy.  The stronger Australian dollar has caused manufacturing costs for car manufacturer General Motors to rise, and this coupled with a small domestic market encouraged the firm to stop producing cars in Australia from 2017. The US car producer Ford announced that it would stop making cars in Australia earlier on this year, and the new move from General Motors now poses a threat to the car industry which has increased the importance of retaining Toyota’s business.

Prime Minister Tony Abbott is holding talks with car producer Toyota in an attempt to convince the firm to continue to manufacture motors in Australia and prevent potentially thousands of job losses. This emphasizes the strain a strong currency is having on business costs, making foreign made cars more appealing to consumers. After the numerous failed attempts at talking down the Australian dollar, comments from RBA Governor Stevens regarding intervention finally got the ball rolling. More Aussie weakness is needed, however with the GBPAUD rate currently at 1.83, the rate is moving in the right direction.

Sasha Nugent

Currency Analyst

Caxton FX

Caxton FX Weekly Report: The pound directs GBP/USD and GBP/EUR higher

The Bullish Sterling Investors surface

Last week the pound showed its strength, and sent the GBPUSD rate straight through 1.63 after the second GDP estimate prompted investors to buying the pound. This strength has continued so far this week, and maintaining this in current sessions will partly depend on the performance of Construction and Services PMI figures due in the next few days. Another solid set of numbers here should encourage more sterling momentum and will put increasing pressure on both the euro and the dollar. GBP/EUR is looking more comfortable around the 1.2090 level and after sterling dipped above 1.21 we could see these levels remain in the days ahead. The Bank of England will announce its rate decision on Thursday and it is unlikely that the central bank will alter monetary policy. At the moment it looks like it could be another week for the pound to extend recent gains.

What tools will the ECB pull out next?

After all the talk about the next possible policy move from the ECB, Thursday the ECB monetary committee will meet and they will announce their interest rate decision. After last month’s surprise cut, it is unlikely we will see any change in the interest rate when they meet this week, however what will be of more interest, is the press conference to follow. The issue of low excess liquidity for European banks remain, and the mystery of whether the central bank will opt for another LTRO remains. There has also been some talk suggesting that maybe the ECB should consider quantitative easing. A tool that the central bank has avoided and the BoE and Federal Reserve have embraced. The press conference should provide some clarity on these topics and if none are on the horizon, we should see some of the pressure on the euro ease.

Services PMI data will be released this week and could offer the euro some short term relief after a period of weakness. However with sterling looking stronger it may not be able to recover as much as we have seen previously.

It’s that non-farm payroll time again

With GBPUSD levels now trading around 1.64, it is evident that dollar weakness will remain as long as tapering delays continue. US data last week, such as unemployment claims, has failed to do enough much for dollar strength and so market focus turns to the employment report due on Friday. The last non-farm payroll figure surprised the market and stirred speculation that the Fed could possibly begin to taper back purchases this month. This makes Friday’s figure ever more important, and a reading in line or above expectations may result in some investor repositioning. Ahead of the employment report on Friday, there is more than enough data to keep the market busy such as ISM manufacturing and non-manufacturing PMI, preliminary GDP q/q and unemployment claims. Although these numbers are unlikely to trigger significant dollar momentum, strong data could put the dollar in a much better position ahead of the jobs report on Friday.

Optimism regarding the Chinese economy has also affected the dollar’s strength. Demand for safe haven currencies such as the dollar has fallen amid signs of a pick- up in global manufacturing. It is unlikely this influence will last too long, however in the short-term, this will contribute to the greenback’s struggle to
regain ground.

End of week forecast

GBP / EUR	1.2120
GBP / USD	1.6300
EUR / USD	1.3500
GBP / AUD	1.8100

Sasha Nugent 

Currency Analyst

Caxton FX

Sterling bulls focus on GDP

This morning, UK GDP was released and as expected there was no revision to the preliminary reading of 0.8%q/q growth. The pound rallied on the back of this and sent cable shooting through 1.63. Similarly, the GBPEUR rate rose and is now fluctuating around the 1.20 level. Preliminary Business Investment figures were also released this morning and after falling 2.7%, business investment rose by 1.4%q/q below the expected figure of 2.3%q/q growth.

What is particularly interesting is that the market’s focus was on the GDP figure and the fact that business investment was below expectations meant little. In the opening remarks of the Inflation Report Press conference, Governor Carney emphasized the issue of absorbing slack in the economy, and stated that a strong and sustained recovery is needed in order to achieve this. Carney also stated that “A sustained recovery requires a revival of business investment”. Baring this in mind, it seems strange that the market’s attention is not being put on the fact that business investment growth is still slacking. The need for more robust growth has come from the horse’s mouth, yet the market feels the need to focus on a GDP reading that only confirmed what we had already known.

It is fair to acknowledge the rise in business investment and consider it positive, but surely the market needs to draw their attention towards the need for this type of investment to gain traction. A lot of sterling’s recent strength has been on the back of the possibility of a rate increase in 2015. We also know from the inflation report that we could have a situation where unemployment has reached the 7% benchmark, but the BoE maintains loose monetary policy. If the sterling bulls want to see a rate increase by 2015, they may want to pay a little more attention on the progression of factors such as business investment, which may help to gauge how sustainable the recovery is and therefore when the BoE will be likely to raise rates.

Sasha Nugent

Currency Analyst

Caxton FX 

Caxton FX Weekly Report: Talks of looser monetary policy from the ECB keep the euro on the back foot

Super Sterling Returns

Despite a light calendar, it was an impressive performance for sterling last week as CBI Industrial Order Expectations smashed estimates and drove both the GBP/EUR and GBP/USD rates higher. Levels remain elevated and there is still a chance there are some bullish sterling investors waiting for the moment to push the rate further. The main release this week will be the second GDP estimate, and any upside surprise here will most likely trigger some more sterling momentum.

On Tuesday, The BoE governor and the monetary policy committee will appear before the Parliament’s Treasury Committee to discuss the central bank’s latest inflation report. This will present an opportunity for the market to move on the MPC’s comments, especially if they reveal more about the future of interest rates. Sterling should be well supported this week but it is unlikely the big moves will come from the British side of things.

Eurozone inflation figures on watch

Last week it was revealed that the ECB monetary policy committee had discussed negative deposit rates. Although President Draghi has managed to calm the markets, it may not take much to get the topic brewing again. The key release will be the eurozone inflation figure which is expected to rise to 0.8% y/y. If the actual figure comes out significantly higher than expected, we expect more of the euro bulls to come out of the woodwork and it would be another move lower for GBP/EUR. Despite the fact that the ECB expect inflation to remain low for a prolonged period, a lower CPI reading could easily reignite talk about the possibility of negative deposit rates. This morning, there have also been comments from ECB member Hansson claiming there is room for the ECB to cut rates further. There has been some slight euro weakness on the back of these words however the market seems to have adjusted to the prospect of lower interest rates.

Eurozone figures such as GFK German Consumer Climate and German unemployment change could provide some support the euro. Last week we witnessed strong German Ifo Business Climate figures drive the GBP/EUR rate towards 1.1950 and push EUR/USD through 1.35. The same can happen again this week provided these numbers beat estimates.

The market eyeballs US data

After showing some signs of recovery, the disappointing Philly Fed manufacturing Index has placed the dollar on the back foot once again. The positive flash manufacturing PMI and unemployment claims figures were not enough to limit dollar losses, and this suggests that US data is being watched even more closely after the last FOMC minutes. With the window slightly open for a December taper, economic figures from the US need impress in order for significant repositioning to take place, and increase demand for the dollar.

First up we have pending home sales due this afternoon, and this figure could get the ball rolling for a better week for the greenback. Building permits, CB consumer confidence, Core Durable Goods orders and unemployment claims are all due this week and will receive attention from the market. With the non-farm payrolls figure due next Friday, an extremely strong unemployment claims figure should help get some dollar optimism stirring ahead of the employment report next week.

End of week forecast

GBP / EUR	1.1950
GBP / USD	1.6140
EUR / USD	1.3450
GBP / AUD	1.7720

Sasha Nugent

Currency Analyst

Caxton FX

RBA Governor Stevens takes the first steps in weakening the Aussie

After months of complaining about an “uncomfortably” high Australian dollar, RBA Governor Stevens has finally said enough to ease Aussie momentum.

The RBA’s latest monetary policy minutes, revealed that although the effects of the last rate cut are still filtering through the economy, the committee haven’t closed the door on lowering rates further. The central bank has raised the issue of a persistently strong Aussie and the potential problems this can cause for the recovery. Consequently, there have been several attempts to talk down the AUD, but this has failed to make any lasting impact. The prospect of looser monetary policy has not shaken the markets enough to encourage significant Aussie weakness.

This morning, RBA Governor Stevens claimed that he is ‘open minded on intervention to lower AUD’ and this comment got the ball rolling. GBPAUD opened at 1.7253 and has jumped over two cents to 1.7470 during trading today. The fact that Governor Stevens is ‘open’ to intervention suggests the RBA are serious about the currency’s strength, and could act to weaken the Australian dollar if need be.

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

Caxton FX Weekly Report: Sterling takes a back seat after the BoE Inflation Report

Anything more from the BoE?
The BoE Inflation Report was released last week, and although the central bank is not in any rush to raise rates, the report displayed some optimism about the UK outlook. The Bank of England revised their UK growth forecast upwards, and their inflation projections downwards (under the assumption the Bank rate follows the market rate). What the currency market particularly focussed on, was the prospect of a rate increase in late 2015. With the labour market improving faster than expected, the BoE now forecasts the
unemployment rate will reach 7% quicker than the time frame given in the August Inflation Report.

This week, the main UK release will be the Bank of England monetary policy minutes and we doubt the language in the minutes will differ much from what we saw in the Inflation Report. Although the minutes are likely to highlight the improvement in the labour market, we may see some emphasis on the headwinds the UK economy still faces. A generally light calendar for sterling leaves it open for weakness and this could allow the dollar and euro to potentially drive GBP/EUR and GBP/USD lower.

What can the euro do to regain momentum?
The euro remained on the back foot for most of last week, especially against sterling. The BoE inflation report spurred demand for the pound and drove the GBPEUR rate above 1.19. The prospect of a rate hike from the BoE in 2015 is directing this rate upwards, and in order for the euro to regain control (at least in the short term), this week’s PMI figures need to provide some upside surprise. Last week we saw evidence of a slowing Eurozone economy and so any data that suggests a pickup in economic activity should put the euro in a better position against both sterling and the dollar. With a heavy calendar ahead for the US, it will be more difficult for the euro to push EUR/USD higher. There are still some bullish euro investors around, and it is more likely that the single currency will do better against sterling than the dollar.

Will we see more evidence in favour for Dec tapering this week?
Last week the Senate Banking Committee hearing for Fed Chair nominee Janet Yellen was the main topic surrounding the dollar. Despite some dovish comments, Yellen recognised the fact that the US economy is making progress and that QE could not continue indefinitely. These remarks helped limit dollar weakness and allowed cable to trade around levels seen earlier on in the day. The dollar however, finished the week on a bad note after Empire state Manufacturing Index came in below expectations. In the busy week ahead, there is plenty of opportunity for the dollar to pare back losses and build evidence to support the Fed’s tapering case. The FOMC meeting minutes will be released and this gives the market yet another insight on the Fed’s take on the US economy. More importantly, there could also be an indication of the likely timing of tapering, which will allow investors to begin to reposition their portfolios.

End of week forecast

GBP / EUR	1.1880
GBP / USD	1.6100
EUR / USD	1.3500
GBP / AUD	1.7110

Sasha Nugent

Currency Analyst

Caxton FX

Caxton FX Weekly Report: Will the BoE raise their UK growth projections?

Give and Take
Sterling had a good week last week as PMI figures gave the pound a solid footing to gain against its major currency pairs. Services PMI rose at the fastest pace in 16 years allowing sterling to direct the GBP/EUR rate higher. Industrial production figures also provided upside surprise and with a little help from the ECB, the GBP/EUR rate managed to breach 1.20. This week there is plenty of opportunity to see the pound build on current levels. UK inflation data is released and figures are expected to show inflation slowed for another month to 2.5%y/y. Unemployment data is also due and a continued improvement in claimant count numbers should encourage a stronger pound. The BoE will release its inflation report and this will be the main event for sterling. Optimism about the UK outlook has continued to increase and after the latest PMI numbers, we could see the Bank of England raise its projections for UK growth. More positive language from the central bank should be welcomed by the market, and we could see another push for 1.20 in the days ahead.

More euro weakness to come
The euro has already experienced some significant weakness after the ECB unexpectedly cut rates to 0.25%. Despite the large movements, we could see more weakness this week depending on the outcome of Eurozone GDP readings. Any downside surprise in these figures could possibly encourage more euro selling, and provide further justification for the ECB’s rate cut. Significant releases from the UK should also support a move to drive GBP/EUR higher, especially if the BoE raise their forecasts for UK growth. The euro has managed to reverse some losses so far today, with the EUR/USD rate climbing towards 1.34 once again, and GBP/EUR declining towards 1.19, but it is unlikely that this can be maintained in the days to come. With the window for a December taper ajar, the euro also remains vulnerable against the dollar.

Non- farm payrolls puts greenback back in the race
Non-farm payrolls came in significantly above expectations, and this has prompted some increased demand for the dollar. The figure highlighted that despite the deceleration in payrolls, the labour market is still in decent condition. Although this figure alone isn’t enough to warrant a December taper, it does open the door to the possibility which should be enough to keep the dollar in better condition going forward. Economic releases this week should also support a firmer dollar and encourage some optimism about the US economy.

On Thursday, Janet Yellen will face the Senate Banking Committee for a grilling before deciding whether to send her nomination for full Senate approval. While Yellen only needs a handful of votes from Republicans in order to pass necessary procedures when her nomination reaches the Senate, Republicans will not hesitate to scrutinise a policy which they feel is building up future inflationary pressures.

End of week forecast

GBP / EUR	1.1980
GBP / USD	1.5950
EUR / USD	1.3350
GBP / AUD	1.7100

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

UK Services PMI delivers the goods but for how long?

Over the past last few sessions, sterling has been struggling to maintain gains against the euro. Positive economic figures from the UK have done little to push the GBPEUR rate significantly higher, and even a solid construction PMI figure couldn’t do enough to force GBPEUR beyond recent levels. Yesterday the service PMI reading increased to 62.5 and showed the service sector grew at the fastest pace in 16 years, while new orders was at its strongest level since records began. This allowed sterling to finally return to the driving seat, with the GBPEUR rate shooting through 1.19.

In order to see more substantial moves, and to ensure sterling holds up against the euro, UK data needs to provide stellar results. With the picture brightening over the past few months, evidence suggesting the recovery is building momentum has grown and optimism about the UK outlook has increased. Today we have seen solid numbers from UK manufacturing and industrial production, and mixed results from the eurozone such as falling retail sales, and rising German factory orders. Initially the GBPEUR rate rose after the release of UK data, however German factory orders were enough to erase sterling gains and send the rate below 1.19 again. This shows that UK releases that are in line, or marginally above expectations are unlikely to produce enough momentum to keep sterling competitive against the euro.

While the pressure on the euro is helping sterling to direct GBPEUR higher, a more hawkish shift from the central bank will do more to ensure an upward trend in GBPEUR. The market is already predicting the central bank may raise rates earlier than outlined in forward guidance, but for now an increase in the BoE’s economic projections released next week should be welcomed by the market. This may provide GBPEUR with more sustainable support, helping to drive the rate higher in the near term.

Sasha Nugent

Currency Analyst

Caxton FX

Caxton FX Weekly Report: Euro takes a back seat as inflation puts pressure on ECB

Can sterling remain above 1.18?
The eurozone inflation and unemployment data allowed GBPEUR to recover from levels below 1.17, to start the week above 1.18. Today, UK construction PMI beat estimates, and this has seen a slightly revival in the GBPEUR rate. Last week we saw a solid manufacturing number do little for the pound suggesting investors need more solid excuses to sell euros to see sterling really get back in its stride. The Bank of England will announce their rate decision on Thursday, and with monetary policy expected to remain on hold it is unlikely this will do much for the pound. There is plenty of downside risk against the dollar, and with fresh optimism brewing, it is possible GBP/USD could continue to trend downwards.

It’s time to let the euro take a back seat
After sessions of pushing the GBPEUR rate gradually lower, euro strength has eased, and it is now much more vulnerable that we have seen in recent weeks. The ECB rate announcement and press conference will be the key. The poor inflation figures released last week, has fuelled speculation that a rate cut may be needed in order to curb the eurozone’s problem of slowing inflation. If the ECB decide to hold rates, focus will then be on whether the central bank sees rate cuts in the future, and if not, what other tools are available. European Banks are falling short of excess liquidity and with time running out, the market will also be looking for an indication of whether these banks will be supported through another round of LTROs. For the first time in a while the euro will on the back foot, and this presents the opportunity for both sterling and dollar to dictate the direction of the GBPEUR and GBPUSD rates.

Renewed optimism supports a firmer dollar
Decent economic figures coupled with a less dovish central bank have helped the dollar start this week in better position. Whether greenback will be able to maintain these gains is largely dependent on data releases this week. Non-farm payroll is due on Friday, and economists expect this reading to show employers hired less workers before the shutdown. If this proves to be true, we may see a reversal in some of the dollar’s recent momentum as figures suggest that the pace of hiring continues to slow. After the central bank highlighted the need for more evidence to support tapering, a weak employment report even before the shutdown would rather encourage the central bank to take a slightly more dovish stance. The advanced GDP q/q reading will also be of interest, and a stronger figure here should be welcomed by the market. A dovish ECB may be enough to keep the dollar in control of EUR/USD, especially if the ECB hints that a rate cut is on the table. However, to maintain gains against sterling will be more difficult, and other economic figures such as ISM manufacturing and unemployment claims are needed to support downward movement in GBP/USD.

End of week forecast

GBP / EUR	1.1850
GBP / USD	1.5940
EUR / USD	1.3480
GBP / AUD	1.6820

Sasha Nugent

Currency Analyst

Caxton FX

November 2013 Monthly Report: US dollar stages a comeback

Sterling has remained on the sidelines for the majority of October. With some economic figures coming in below estimates, investors have adjusted their expectations accordingly, encouraging them to unwind sterling long positions. The pound is likely to remain on the back foot this month and we doubt economic figures can provide enough surprise to lure investors back into sterling. However, the latest Bank of England monetary policy minutes revealed a less dovish tone from the central bank, and if this continues, could help sterling resist a buoyant euro.

The market has been taking every opportunity to support a stronger euro, and despite some weak economic data, the single currency doesn’t seem to have run out of steam just yet. Even though the ECB outlined the importance of the exchange rate to the recovery, members haven’t displayed much concern towards euro strength. As excess liquidity in the eurozone declines, attention turns to the policy tools the central bank will use in order to support European banks.
Dollar weakness has continued into the new month despite managing to pare back some losses against both sterling and the euro. The US government standoff gave investors an excuse to sell dollars after the Federal Reserve kept monetary Policy unchanged in September. We should see the dollar begin to get back on its feet this month, as clearer data allows investors to get a better picture of the likely timing of tapering.

Not looking great for sterling in the month ahead 
It seems like the period of sterling superiority has faded, and now it is time for sterling strength to take a back seat. The market now views previous sterling strength as excessive, and with last month producing softer economic data, investors have been encouraged to reduce sterling holdings. Nevertheless the outlook on the UK economy hasn’t changed. Optimism regarding the UK recovery remains and strategists have begun to raise their forecasts for GBP/EUR. We expect solid data figures to continue in November, however in order to witness some significant sterling momentum, economic data will have to provide some significant upside surprise.
Last month we saw a slight shift in the Bank of England’s stance, and although there were no policy adjustments the central bank highlighted that unemployment has improved marginally faster than forecasted. The monetary policy minutes from the last meeting noted that it was now possible that unemployment will be lower, and growth faster in the second half of the year, than predicted at the time of the August Inflation Report. This less dovish language may be what is needed to keep sterling competitive especially against the euro this month. If the central bank continues to display a more positive tone about the UK economy (especially unemployment), it could reignite speculation about when the BoE will consider raising rates. Next week the BoE’s monetary policy committee will meet and it is unlikely that we will see any change in policy. Eyes will then await the release of the monetary policy minutes to identify whether this rhetoric has continued into November.

GBP/EUR

Euro domination
There has been a big shift in momentum in the last month, and the demand we had seen for sterling has now moved to the euro. Euro strength has become a hot topic, and although the ECB have remained dovish, their lack of concern about euro momentum has given investors the green light to buy euros. In the press conference after the last ECB rate announcement, President Draghi highlighted the importance of the exchange rate to the eurozone recovery but didn’t signal any immediate concern about the single currency’s recent strength. It was only this week that ECB member Nowotny said he doesn’t see any tool the ECB could use against the strong euro, and it is something that we will just have to deal with. With comments like that it is no surprise investors are bullish on the euro, and this against bearish behaviour towards sterling set the tone last month. Investors have disregarded some more disappointing releases from the eurozone, and penalised sterling for some poor UK numbers. However, this week eurozone unemployment data was released and showed unemployment rose to 12.2% allowing sterling to rally through 1.17 and close at 1.18. Inflation is also becoming an increasing problem, and with CPI now at 0.7% y/y, the pressure is mounting for the ECB to take action, and possibly cut rates. This may be an indication that not everything can be ignored, and some euro weakness is in sight.

European banks are running out of excess capital and the ECB has said that there are a number of tools available in order to support banks, sparking talk of another round of LTROs. In an interview, governing council member Nowotny said that it is clear that there would be a liquidity provision but refrained from outlining what measures the ECB would use. As the month unfolds, there will be more focus on this, and if one is announced, it is likely to dampen recent euro strength and edge GBPEUR higher.

The ECB has scheduled a comprehensive assessment of 124 of the most significant Eurozone banks between November 2013 and October 2014. This includes a Supervisory risk assessment, asset quality review and stress test. It is possible that banks will begin to reduce the amount of foreign currency dominated assets held, to purchase euros in an effort to clean up their balance sheet. This could begin to influence the rate also.

GBP/USD

Is the storm over?
Neither currency in this pairing had it easy last month, however the problems just kept piling on for the dollar. After more than two weeks in partial shutdown, the US government managed to raise the debt ceiling in time to avoid default, but this was only raised till February 2014. Whilst this decision removed the immediate threat of default, it was by no means a solution, and this set the dollar up for weakness. The influence the shutdown had on the economy has also affected the Federal Reserve’s decision on whether to taper their asset purchases this year.

As we enter the new month the greenback is under a little less pressure than it was in October. This week the Federal Reserve kept interest rates and asset purchases on hold for another month, as expected. In the accompanying statement, the Fed seemed optimistic, but said more evidence is needed in order to pare back stimulus. The less dovish language provided the greenback with some momentum, edging the GBP/USD rate lower. Whether we can see this trend continue is dependent upon the performance of US figures. The shutdown has given the central bank more time to assess economic conditions, and as distorted data clears the way for more accurate releases, evidence should begin to build in favour of tapering.

The September employment report revealed 148k additional workers and a decline in the unemployment rate to 7.2%, the lowest level since November 2008. October’s payroll reading is expected to be show a modest increase, highlighting the slowing trend in payrolls. The market will pay particular attention to employment figures and any indication of an improving labour market will encourage more bullish behaviour, as well as increased speculation about the timing of tapering.

In the month ahead we feel the dollar will stabilise but will remain vulnerable to some weaker data releases. This may provide sterling with pockets of opportunity to push the GBPUSD rate higher but there is a fair possibility we could see this rate marginally trend downwards this month.

GBP/EUR: 1.1875
GBP/USD: 1.5920
EUR/USD: 1.3460

Sasha Nugent
Currency Analyst
Caxton FX