A week of mixed data leaves Cable stalled in the 1.68’s, the Bank of England’s inflation report underlines the positives of the economic recovery but leaves room for improvement.

A stern warning from Mark Carney in a televised interview this last Sunday has emphasized the focus of the Bank of England on tackling the price increase in UK housing. “When we look at domestic risk, the biggest risk to financial stability and therefore to the durability of the expansion, those risks centre in the housing market and that’s why we are focused on that”. The focus was on the possibility of the Financial Policy Committee taking action at their June meeting to reduce the inflation of housing prices by reducing the Help to Buy programme which offers mortgage guarantees to borrowers with small deposits. This Help to Buy programme launched by the government was criticized by economists because it fuelled demand rather than tackling inadequate supply.

UK – The Bank of England released their quarterly inflation report last Wednesday in which they emphasized that interest rates need to stay low for a significant period of time, as an interest rate hike would be a last resort for dealing with the concern of rising housing prices. Carney taking a dovish tone during this meeting undermined the pound, and has helped keep an upward limit on the GBP/EUR and GBP/USD rates. Out of the UK this week, we will have the CPI y/y on Tuesday, votes on the MPC Asset Purchase Facility and the Official Bank Rate as well as retail sales on Wednesday, and a second estimate GDP q/q on Thursday. Positive data this week out of the UK could help to boost the pound across the board, as the pound has had a pullback in the last two weeks or so.

EUR – The Euro has suffered in the wake of the last ECB meeting, as the market is steadily pricing in potential ECB market intervention action at their June meeting. In the last two weeks, EUR/USD has fallen a percent and a half as the Dollar has had a rebound and the euro has suffered. Data from the Eurozone this week to watch out for will be French and German Flash Manufacturing PMI on Thursday and German Ifo Business Climate on Friday. European parliamentary elections will also take place this next Sunday, in which voters from 28 European Union countries will elect 751 members to the European Parliament. Elections can create volatility with a currency, and European Polls show that anti-EU extremist parties from the left as well as the right are expected to gain support as well as parties from Greece and Spain that are opposed to the current EU leadership.

USD – The USD has been holding its current levels and even improved against many currencies, as the Dollar Index is relatively flat from a week ago. The US economic outlook is improved after a disastrous first quarter GDP where there was barely any growth as a result of a harsh North American winter earlier this year. Analysts expect the FOMC meeting minutes on Wednesday evening to reflect the sentiment that the US recovery is underway, but any dovish sentiment from Janet Yellen could further derail the currency. Other US data this week will be Unemployment Claims and Existing Home sales on Thursday and New Home Sales on Friday.

End of Week Forecast:

GBP/EUR – 1.2175 

GBP/USD – 1.6750 

EUR/USD – 1.3650

GBP/AUD – 1.80

Nicholas Ebisch

Corporate Account Manager

Caxton FX

Weekly Market Analysis - UK Economic figures drive GBP to gains against most currency pairings, whilst the eurozone takes a more dovish tone following the World Bank and IMF meetings last weekend.

GBP
The UK unemployment rate dropped to a five-year low of 6.9% on Wednesday
which reinforced positive Manufacturing data from a week earlier. GBP/USD rose
to the highest level since 2009 in what is a clear sign of economic confidence
developing in the UK economy. This has put more pressure on the Bank of
England at their next meeting to at least discuss an interest rate rise. However,
there is not a distinct timeline for a rate increase at the moment, as the Bank of
England altered their forward guidance framework last fall to look more broadly
at economic indicators before committing to a more definite timeline. Next week,
the major events on the economic calendar are the MPC Asset Purchase Facility
Votes and MPC Official Bank Rate Votes on Wednesday, followed by the Retail
Sales m/m figures on Friday.

EUR
Mario Draghi stated in New York this last weekend after the IMF and World
Bank meetings that further strengthening of the euro would require additional
ECB intervention because of the low level of inflation in the eurozone. The
international community has overwhelmingly expressed their concern to Draghi
about the low rate of growth in the eurozone and that measures need to be
taken to boost economic growth in the region. Any instability or sign of an
economic decline in the eurozone would have negative ramifications for global
markets because of the eurozone’s central role within the global economy.
Mario Draghi has stated that if further action is taken, it will be an interest rate
cut which precedes further quantitative easing. Draghi is due to speak at a
conference in Amsterdam on Thursday and may provide more clues as to the
further action that the ECB has planned.

USD
The dollar’s performance was weakened over the last week largely thanks
to Janet Yellen making a distinction about the likelihood of an interest rate
rise. During a speech last week, the Federal Reserve chairwoman included
in her comments that there will be a ‘considerable time’ between the end
of Quantitative Easing and the first interest rate rise. This undermined her
comments from the Federal Reserve meeting on March 19th where she said that
an interest rate rise may follow as early as six months after the end of the QE
Programme. The more dovish tone from Yellen has given the Federal Reserve
more breathing room as the Fed continues to voice their concerns about the
sluggish economic recovery, rather than the need for a higher interest rate.

End of Week forecast –

GBP/EUR – 1.2250

GBP/USD – 1.6890

EUR/USD – 1.3770

GBP/AUD – 1.7900

Nicholas Ebisch
Corporate Account Manager
Caxton FX

Weekly Report - Sterling feeling the resistance after a mid-week boost, ECB lays out a clearer plan in the monthly bulletin, dollar takes a beating.

UK – Although the pound is performing very well this last week, there does seem to be resistance from other currencies against the pound, which is limiting its gains. Manufacturing Data on Tuesday gave Sterling a boost, but the question is how long can it stay in the spotlight with limited data in the next week to support it? UK data throughout the week will start off with CPI y/y figures on Tuesday, followed by the Claimant Count Change and Unemployment rate on Wednesday. The house view is that Cable will most-likely retreat from its relatively high levels, as the dollar continues to slowly but surely gain strength as the Federal Reserve winds down the QE programme.

Eurozone – The ECB monthly bulletin made it clear that there was not a change in the Minimum Bid Rate at the beginning of this month because “the moderate recovery of the euro area economy is proceeding in line with the Governing Council’s previous assessment”. However, the bulletin reiterated Draghi’s points from his press conference earlier this month that the ECB stands prepared to act swiftly with monetary accommodation and lower interest rates if required. This has helped to strengthen the Euro at the end of the week. In the next week, the only major event directly affecting the Euro will be German ZEW Economic Sentiment on Tuesday. The Euro ended the week on a high note, as the monthly bulletin last Thursday, combined with positive sentiment toward the Eurozone as the result of a highly-successful Greek bond sale, allowed it to gain strength near the end of the week. However, President Draghi blamed the strength of the Euro for the low rate of inflation in the Eurozone over the weekend, and made the statement that the “further strengthening of the Euro requires further monetary stimulus”, signalling that unconventional monetary policy may not be far away.

USA – FOMC meeting minutes which were released on Wednesday evening of this last week confirmed that there was discussion about the central bank’s collective concern over the low rate of inflation. The concern was not enough to warrant a clearer timeline of when we can expect the next interest rate rise, but the market has interpreted it as a sign that interest rates will stay low for longer, undermining the USD at week’s end. During this next week before the Easter holiday, the data to watch for which will affect the dollar will be Core Retail Sales m/m and Retail Sales m/m on Monday, Core CPI m/m and Janet Yellen speaking at a Federal Reserve conference in Atlanta on Tuesday, Building Permits data and Janet Yellen speaking again at the Economic Club of New York on Wednesday, and finally, Unemployment Claims and the Philly Fed Manufacturing Index data on Thursday. Cable does seem to be at the top of the range, and barring any big surprises in the market, we should see the dollar able to pare back some of the losses it sustained last week against other currency majors.

End of week forecast:

GBP / EUR	1.2100
GBP / USD	1.6650
EUR / USD	1.3750
GBP / AUD	1.7750

Nicholas Ebisch

Corporate Account Manager

Caxton FX

EUR, GBP, JPY benefit from dollar weakness

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

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

Nicholas Ebisch

Corporate Account Manager

Caxton FX

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

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

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

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

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

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


The BoE lines up more talk to weaken the pound

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

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

GBP/EUR

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

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

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

GBPUSD

Another taper from the Fed, and dollar momentum gets underway

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

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

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

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

Sasha Nugent
Currency Analyst
Caxton FX

Caxton FX Weekly Report: Sterling strength eases

Sterling takes a breather after an eventful week

After what has been a volatile week for sterling, the days ahead look a little calmer for the currency. UK unemployment data has given the pound a lot of support, despite the fact that the BoE are still a way of from raising interest rates. BoE Governor Carney claimed that the recovery is still not strong enough to warrant a
tightening of policy, and also expressed some concern regarding a stronger pound. These dovish statements will continue to weigh on the pound, at least until the next Inflation Report sheds light on where monetary policy is heading. The Governor is due to speak on Wednesday afternoon and if the language is similar to what we heard last week, sterling will be on the back foot against both the euro and the dollar. The UK preliminary GDP reading will be published on Tuesday and any upside surprise here should limit potential losses for the pound.

The ECB are prepared to fight deflation

Concern about global deflation is building, and after the ECB cut interest rates to combat deflationary pressures, the market has been worried about whether the deflation is on the horizon for the euro area. On the panel at the WEF in Davos last week, ECB President Draghi explained that he doesn’t see deflation in the eurozone. Draghi also signalled that the central bank is prepared to fight deflation by using means other than quantitative easing- an option both the Fed and BoE have adopted. The Governor suggested the bank may opt to buy packages of bank loans to houses and companies if economic conditions worsen.

With inflation at the forefront of the regions problems, CPI figures released on Friday will be a focal point. Another decent rise in price pressures will support Governor Draghi’s claim that the eurozone is not heading for deflation, but is rather experiencing a prolonged period of low inflation. Upside surprise here will be
welcomed and will most likely provided the euro with the boost needed to sustain levels beyond 1.37 in EUR/USD. Sterling will be on the back foot, and any upside surprise here could see levels below 1.20 return temporarily.

Will we see another reduction in stimulus from the Fed?

The Federal Open Market Committee will meet this week to decide whether to reduce stimulus further from the current $75bn per month. Despite the last payroll figure coming in short of estimates, the market hasn’t ruled out the prospect of another reduction from the Fed and this should bolster the dollar. Ben Bernanke 

comes to the end of his term as Fed chairman this week, leaving Janet Yellen to take up the post in February. 

A slew of economic figures will also be released, including CB consumer confidence, advance GDP, pending home sales and unemployment claims. Provided these figures produce some decent results we could see the dollar regain support and drive both the GBP/USD and EUR/USD rate lower. The greenback has managed to prevent the euro from maintaining levels above 1.37, but if the Fed maintain their current asset purchase program, and data disappoints, the euro could have the opportunity needed to sustain levels above 1.37.

End of week forecast

GBP / EUR	1.2010
GBP / USD	1.6480
EUR / USD	1.3600
GBP / AUD	1.9070

Sasha Nugent

Currency Analsyt

Caxton FX

January 2014 Currency Report: Sterling regroups in a bid to maintain momentum

Sterling momentum strengthened last month after strong employment data encouraged sterling buyers to resurface. The pound managed to get the upper hand on the euro, whilst the dollar struggled to drive the GBP/USD rate downwards, despite the Fed’s tapering decision. As we enter the New Year, the same factors will influence the pound’s strength and the debate about when the BoE could raise interest rates will continue. The market’s eye will remain fixed on the improvements in the labour market as well as price pressures.

There are still plenty of questions regarding the eurozone, and although the region is showing signs of progress, the issue of deflation and a buoyant euro remains. The ECB have maintained their dovish stance in the last few months and have reiterated their commitment to price stability, claiming the central bank have various tools to combat low inflation. We are yet to know what these tools are, and going in to January, the market will be paying close attention to any language from the ECB which may shed some light on the central bank’s ammunition.
As we approach the next US debt ceiling, some of the pressure on the government has faded amid the agreement in spending levels reached by Democratic and Republican negotiators. Although this agreement avoids a shutdown occurring this month it has not yet been passed through congress and does not increase the US debt limit, leaving the potential for budget crisis still open. Tapering has finally begun, with the Federal
Reserve trimming $10bn from asset purchases reducing the total to $75bn a month. The Fed has managed to convince the market that tapering is not tightening and updated their forward guidance claiming that interest rates will remain low even after the unemployment rate has reached 6.5%.

The year begins on a positive note

With UK economic data still impressing, this month the market is looking for signs to help gauge how sustainable the recovery is. The outlook for the nation is pretty much unchanged and although the last inflation reading showed inflation fell closer to the BoE’s 2% y/y target, there is still a possibility we could see a rate increase in 2015. We know from the latest inflation report, that slack in the economy needs to be absorbed and business investment needs to pick up. The market seems to have pushed these details to the side for the time being and focus remains on the labour market as well as price pressures. As a result, we doubt things will be much different from last month. Language used by the monetary policy committee will be monitored carefully. Last month we witnessed a sterling sell off after comments from BoE member Weale suggested the central bank will maintain loose monetary policy even after the 7% unemployment threshold has been reached. This triggered sterling weakness and if more dovish language is expressed by the BoE we doubt the market will hesitate when unwinding sterling long positions. It will be a difficult month ahead for sterling. With tapering talk limiting potential gains against the dollar and euro investors still preventing the pound from holding on to levels above 1.20, a lot more is needed to get sterling to make any meaningful rebound.

GBP/EUR

Euro pressure eases a little

Towards the end of December we saw euro strength re- emerge and combined with lower UK inflation force the rate from levels above 1.21 back towards 1.18. After the ECB’s last rate cut, eurozone inflation rose to 0.9% y/y, providing the euro with some short-term relief. The ECB’s lack of concern about the currency’s strength encouraged the market to continue to support the euro, and it is unlikely that we will see any change in the ECB’s attitude towards the exchange rate this month. Whilst they have made it clear that targeting the exchange rate is not an option, they have withheld details about what tools are available to combat low inflation. In a number of press conferences and speeches ECB President Draghi has said that the bank expects inflation to remain low for a prolonged period and if downside risks materialise, the bank is ready to take action. There have been whispers that negative deposit rates may be one of the many weapons the ECB has at their disposal, and this month we may get more of an idea about what the central bank has in store. The prospect of another round of cheap loans for European banks may also creep back into focus. The market believes another round of LTROs is on the table, however the central bank are yet to provide any clarity on the likelihood of this happening any time soon. Investors will be listening attentively to ECB members’ comments for clues on the next likely move from the ECB.

There are signs that sterling’s strength has become more sustainable and so we expect the pound to

recover.

GBP/USD

We begin the new year with $10bn less stimulus

There is plenty going on in the US this month to keep volatility in the GBP/USD rate alive. Instead of buying $85bn worth of assets, the Federal Reserve will purchase $75bn in an attempt to wind down the quantitative easing program. The reaction was fairly muted as the central bank managed to convince the market that a reduction in stimulus is not a tightening of policy. The central bank also adjusted its forward guidance, stating that loose monetary policy will remain even after the unemployment rate has reached 6.5%.

Ben Bernanke’s term as Chairman of the Federal Reserve will come to an end this month, paving the way for Janet Yellen to take up the post. Despite Yellen being considered a dove, she supported the move to kick start tapering this month and this suggests she may be less dovish than previously thought. She obtained the Senate’s approval (56-26) to become the first female Chief in the Fed’s 100 year history in last night’s vote.

The issue regarding the US debt ceiling will resurface this month, however, with Republican and Democratic negotiators reaching a deal on spending levels, the risk of a government default has diminished. The deal which is small in size should prevent a shutdown this month if it is approved by Congress, but new borrowings will also have to be passed if a budget crisis is to be avoided.

GBP/EUR: 1.2130
GBP/USD: 1.6280
EUR/USD: 1.3420 

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

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

Lose/lose situation

It was only a few months ago when we witnessed dollar domination but now with cable above 1.61 and EUR/USD reaching for 1.37, it all seems like a distant memory. Initially the Fed tapering debate was steering the greenback to victory, and although we all knew the US had to raise the debt ceiling, it didn’t seem like such a big deal. How wrong we were! The US government managed to raise the debt ceiling before the Oct 17 soft deadline, which wasn’t really a major surprise at all. To think that the US government would go into shutdown was not shocking, but to see the government default on its debt was unthinkable. Although the government pushed the deal to the brink of the deadline, the market wasn’t as shaken as dollar weakness would suggest, and seemed pretty confident an agreement would be made.

So what’s the problem? The problem is that the issue has not exactly gone away. Once the democrats and republicans agreed a deal, the dollar shot up. That was short-lived, and should rather be viewed as a little sign of relief. It didn’t take long for those losses to be reversed and it almost seemed like the US government had not come to an agreement at all. Lifting the debt ceiling till February did half the job; it removed the risk of default but only in the short term. The fact that we may have to revisit this situation again come early next year is what is troubling. The budget deal meant no default and the possibility of a future default, all at the same time.

The shutdown that lasted 16 days is likely to have hampered growth in the US, which has consequences for the Federal Reserve. The health of the US economy has been clouded by the partial shutdown, and so the central bank may need to wait until next year to warrant a reduction in stimulus. Considering this has been the backbone of dollar strength this year, the odds are no longer in the greenback’s favour. The days where strong non-farm payrolls could easily encourage a stronger dollar may have faded for now. Economic fundamentals need to produce some stellar results to see a bounce in dollar momentum, and reignite the tapering debate that has backed the strong dollar performance we saw some months back.

Sasha Nugent

Currency Analyst

Caxton FX