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

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

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

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

The market pares back sterling holdings

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

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

GBP/EUR

Deflation worries haven’t faded yet

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

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

GBP/USD

Can the greenback keep momentum?

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

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

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

Sasha Nugent
Currency Analyst
Caxton FX 

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

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

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

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

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


End of week forecast

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

Sasha Nugent

Currency Analyst

Caxton FX

Caxton FX Weekly Report: UK inflation to support BoE's stance on accommodative policy

Will inflation drop further?

Sterling managed to recover ground last week, especially after claimant count continued to fall and the Chancellor’s budget went down well with the market. The pressure is still on with inflation data due for release tomorrow. Price pressures have eased considerably over the past few months and a drop further to 1.7% will support the central bank’s decision to keep interest rates at current lows. On the other hand, any upside surprise in this reading will most probably encourage demand for sterling. Retail sales data will also be released and after the last reading showed a drop in sales by 1.5% m/m, a figure that beats estimates will be welcomed by sterling bulls. Other data including current account figures should also keep the currency well supported although we expect it will be more difficult for sterling to advance against the dollar than the euro.

Eurozone PMI figures to spur more euro buying

Despite weakening against both the pound and greenback, the euro still has a fair amount of support in the markets. This morning’s PMI data for the euro area was released and the results were mixed. Although the French manufacturing reading beat estimates at 51.9, the German number disappointed coming in at 53.8. This has prevented the single currency from sustaining levels above 1.38 in EUR/USD and has also given sterling a helping hand in maintaining levels above 1.19. With Asian buyers keeping the pressure on, other figures such as German Ifo Business Climate could encourage further strengthening against sterling, especially if UK inflation figures come in below estimates. Things will be a lot more difficult against the greenback as the market adjusts to the prospects of tighter policy in the US by spring 2015. Considering the market’s reaction to today’s figures, it seems like investors may begin to penalise the euro for any figures that are below estimates. Despite this renewed demand for the greenback, we suspect some solid eurozone data this week will be able to keep the single currency competitive.

Finally a firmer dollar to kick start the week

Yellen did the dollar a huge favour last week whether she meant to or not. In the press conference after the Fed announcement, the Fed chair implied that we could see policy tightening in the US by spring 2015. Despite this encouraging demand for the greenback, it may not be enough to ensure momentum is maintained. A slew of releases due this week including CB Consumer Confidence, New Home Sales and Durable Goods Orders will be watched carefully, and they would need to provide some upside surprise to really allow the greenback to get a handle on the euro and sterling. Today Flash Manufacturing PMI will be published (13:45), and a decent figure here should allow the greenback to start the week on a solid footing.

A number of FOMC members will speak this week and the market will be paying particular attention to the language used. Any hawkish remarks will most likely encourage more dollar buying helping to ease the pressure from a buoyant euro as well as sterling.

End of week forecast

GBP / EUR	1.20
GBP / USD	1.6400
EUR / USD	1.3710
GBP / AUD	1.8300

Sasha Nugent
Currency Analyst
Caxton FX

Caxton FX Weekly Report: Chancellor's Budget to offer sterling a helping hand

Sterling prepares for a comeback

After weakening at the mercy of buoyant euro, the pound may be preparing to reverse recent losses in the week ahead. Not only is there a busier calendar with labour market figures being published, but the chancellor is also due to present the latest Budget. With the market expecting some upward revisions to the GDP forecast as well as another improvement in public finances, we could see some sterling strengthening on the back of this. The minutes from the last Monetary Policy Committee meeting will also be released and once again the market will be paying attention to the views of the members in order to gauge the likely timing of policy tightening. The Inflation Report Hearing last week revealed some division in the committee about how much spare capacity there actually is in the economy. The MPC judged that spare capacity is likely to range within 1-1.5% and whilst Governor Carney personally felt slack was at the upper end of the range, other members such as Martin Weale felt that spare capacity was something under 1%. It will be interesting to see whether this difference of opinion was reflected in the minutes, and this will most likely cause some volatility. BoE Governor Carney will speak tomorrow afternoon, so we also expect some movement on the back of this.

Euro takes a back seat after a week of strength

Despite some key economic figures due for release in the Eurozone this week, we doubt the performance seen last week can continue in the days ahead. Having said that, reserve managers are still supporting the single currency and as long as the ECB refrain from talking the currency down, we expect the currency to remain fairly robust. What is even more interesting is the fact that remarks from ECB President Draghi outlining the effect euro strength is having on the exchange rate has failed to grab the market. Draghi stated that a 10% trade weighted appreciation of the euro has typically reduced inflation by roughly 40 to 50 basis points, and also claimed that the currency’s strength was “becoming increasingly relevant in assessment of price stability”. This suggests the central bank may become more vocal in their need for a weaker currency if the euro continues to strengthen. The eurozone inflation figures released this morning showed inflation remains at 0.7% y/y and this suggests the euro will be under a bit of pressure this week. Other figures such as German ZEW Economic Sentiment should offer the currency support, however we expect other major events such as the Chancellor’s budget and the Fed meeting to take precedence.

Another $10bn reduction is on the cards from the Fed
The last employment report has provided the market with confidence that the Fed may not have to freeze its wind down of asset purchases when they meet this week. US retail sales and unemployment claims figures supported the greenback last week and there are number of releases due ahead of the Fed meeting which could encourage this further, including building permits and inflation figures. In her first vote on monetary policy as Chair, we expect the FOMC to keep interest rates unchanged and taper asset purchases further by another $10bn when they meet on Wednesday.

Crimea voted overwhelming in favour of joining Russia over the weekend, but the US and EU continue to condemn the vote. For now markets are relatively calm as they wait for further developments, but with the US and EU threatening sanctions could be implemented as soon as Monday, tensions could escalate very quickly in the days ahead. As a result, the greenback could benefit from its safe haven status as the market shifts further away from riskier assets. Taking into account the potential support for the pound, we expect lower levels in cable will be much more difficult to achieve. Weakness in EUR/USD is more likely, especially after inflation data showed CPI at 0.7% y/y.

End of week forecast

GBP / EUR	1.2040
GBP / USD	1.6600
EUR / USD	1.3800
GBP / AUD	1.8450

Sasha Nugent

Currency Analyst

Caxton FX 

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

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

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

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

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

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

End of week forecast

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

Sasha Nugent

Currency Analyst

Caxton FX

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

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

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

Sasha Nugent

Currency Analyst 

Caxton FX

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

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

Can sterling remain in favour?

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

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

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

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

End of week forecast

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

Sasha Nugent

Currency Analyst
Caxton FX

Caxton FX Weekly Report: GDP data takes centre stage

Sterling stands firm

Although sterling strength has eased slightly in the past week, there is still plenty of demand for the currency. Even disappointing retail sales figures weren’t enough to really get the downward trend in GBP/USD and GBP/EUR going. In the days ahead there will be much less event risk, which leaves the window open for some lower levels in both these rates. The key release will be the second GDP estimate which is expected to be in line with the preliminary estimate at 0.7%q/q growth. Other economic figures such as CBI realised sales and BBA mortgage approvals should provide the pound with some support ahead of the GDP reading.

BoE Governor Carney will speak later on in the week and with the likelihood of interest rate increases underpinning the currency’s strength, sterling bulls will be watching carefully for any hawkish talk. Considering the momentum we’ve seen over the past couple of weeks we expect the pound will be fairly supported, but a light calendar leaves the currency subject to some weakness.

Time for eurozone inflation once again

Focus will shift towards the Eurozone this week as the flash CPI figure will be released, bringing the next move from the ECB into focus. Eurozone data hasn’t been too disappointing lately disregarding the not so impressive PMI figures. Nevertheless, there was nothing significant to suggest the ECB need to act at their next meeting, and we know from numerous speeches that downside risks need to materialise in order for the ECB to act. A lower than expected number will mostly likely cause some severe weakening in the single currency, especially against sterling.

Other Eurozone figures such as German unemployment change and German retail sales could also offer the currency some support. US data has been disappointing over the past week and some solid figures here could trigger some more euro buying ahead of the inflation release on Friday.

What does US GDP have in store?

In the past few weeks there have been some concerns about US growth, especially considering poor data, in particular the non-farm payroll release at the beginning of the month. Levels in cable remain elevated and US data due this week needs to impress in order to get the downward trend going. The key release will be the GDP reading and growth is expected to slow to 2.6% q/q from 3.2% previously. Adverse weather conditions have had an effect on data recently and we expect some of this will be reflected into the reading. The sharp drop in retail sales also support the likelihood that growth was much softer towards the end of last year and possibly the beginning of this year also.

Any upside surprise in this figure will most likely trigger some dollar buying. The Fed is yet to signal any move away from their current plan to continue tapering and for now this is keeping the dollar afloat. It will be a difficult week ahead for the currency and with the greenback on the back foot, we doubt investors will hesitate to weaken the dollar further on the back of some poor results.

End of week forecast

GBP / EUR	1.2060
GBP / USD	1.6620
EUR / USD	1.3770
GBP / AUD	1.8480

Sasha Nugent

Currency Analyst

Caxton FX

Caxton FX Weekly Report: Sterling keeps the pressure on

Sterling soars
It seems that nothing can stop demand for sterling now. The BoE’s adjustment to forward guidance went down well with the market and fuelled significant strengthening of the pound. Although the central bank ruled out any immediate tightening, confidence about the UK outlook and the prospect for a policy tightening in the first half on 2015 is strong. This week there is an opportunity for the pound to advance further as unemployment data could help the pound rebound after inflation came in below estimates. Some more encouraging numbers here will most likely keep the dollar and the euro on the back foot for yet another week.

The latest MPC minutes will be published, and it is unlikely that this will encourage any significant sterling buying. In the last monetary policy meeting the committee opted to maintain the current level of asset purchases and hold the bank rate at 0.50%. Considering the Inflation Report was released just last week, we doubt rhetoric in the minutes will differ much and therefore expect minimal movement on the back of that release.

PMI attempts to rescue the euro 

Despite some solid GDP figures last week, the euro is still struggling against sterling, and has failed to really push the EUR/USD rate further through 1.37. Growth across the region has boosted hopes that the worst of the regions crisis is behind it and this has made the outlook for the eurozone a little brighter. This week Eurozone PMI data will be key and some impressive results should contribute to more a positive view, and therefore be reflected into euro strength.

Last week talks of negative deposit rates in the Eurozone resurfaced as ECB member Coeure implied the ECB had seriously been discussing this option. Although the effect on the euro was temporary the market is still unsure about what is to come from the ECB, which could keep the euro vulnerable.

An important week ahead for the dollar

The greenback has taken a huge hit, especially against the pound as US data continues to disappoint giving investors more excuses to favour sterling. Comments from Fed chair Yellen were regarded as dovish and this has also weighed on the dollar’s performance. A buoyant pound has pushed cable towards three year highs and with sterling buyers waiting in the wings, US figures this week will need to impress to ease pressure off the dollar.

The Federal Open Market Committee (FOMC) will release the minutes from their last monetary policy meeting. Considering remarks made by Fed Chair Yellen, the market will be looking closely for any sign of a dovish bias from the central bank. Since their last decision to reduce asset purchases further by $10bn, yet another disappointing employment report has been released. Although this is unlikely to have a significant impact on their stance, it has provoked some concern about the labour market and an upbeat tone is needed in order to provide the greenback with some support. Pressure on the dollar has eased slightly, however with plenty of event risk ahead, it may not be long before the dollar is penalised for more disappointing figures.

End of week forecast

GBP / EUR	1.2150
GBP / USD	1.6675
EUR / USD	1.3675
GBP / AUD	1.8550

Sasha Nugent

Currency Analyst

Caxton FX

Governor Carney fails to convince the market

Today the Bank of England published its latest Inflation Report which was perceived to be broadly positive as the central bank raised its forecasts for UK growth. In his opening remarks, the Governor said the recovery is not yet sustainable and outlined in forward guidance that the central bank will not raise interest rates until more spare capacity has been absorbed. Other broader measures will also be looked at when considering whether to tighten policy, including the unemployment rate. There was also emphasis on the lack of business investment growth and even when the bank does raise interest rates, the process was described to be limited and gradual as the economy still faces a number of headwinds.

Although the Inflation Report does not lay out a timeline for when interest rates will rise, the market has taken the bullish growth projections as a signal that tightening in Q2 2015 is likely. Lack of productivity has been a key issue for the central bank and they have become even more pessimistic about the outlook. Taking this in account, it is surprising that this hasn’t pushed back market expectations of monetary policy tightening.

Considering the fact that the unemployment rate dropped significantly faster than the BoE predicted, it is no surprise that the market is drawing its own conclusions. Until the central bank is successful in reiterating their commitment to low interest rates, sterling bulls will keep demand for the pound strong.

Sasha Nugent

Currency Analyst

Caxton FX

Caxton FX Weekly Report: All eyes on the BoE

It’s time for the Inflation Report

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

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

Eurozone GDP steps up

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

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

A calmer week ahead for the US dollar

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

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

End of week forecast

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

Sasha Nugent

Currency Analyst

Caxton FX

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

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

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

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


The BoE lines up more talk to weaken the pound

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

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

GBP/EUR

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

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

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

GBPUSD

Another taper from the Fed, and dollar momentum gets underway

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

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

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

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

Sasha Nugent
Currency Analyst
Caxton FX

Caxton FX Weekly Report: The market focuses on the ECB

PMI data encourages more sterling buying

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

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

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

It is the non-farm payrolls time again

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

End of week forecast

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

Sasha Nugent

Currency Analyst

Caxton FX

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

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

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