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

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

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

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

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

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

End of week forecasts

GBP/EUR – 1.2125

GBP/USD – 1.70

EUR/USD – 1.3950

GBP/AUD – 1.8150

Nicholas Ebisch

Corporate Account Manager

Caxton FX

Weekly Analysis - Sterling holds strong, Euro proves resilient, but the US and Australian Dollars fall. This week will be heavy with US and UK data and should be relatively volatile. Sterling has the momentum, but positive US data could well reverse those gains.

GBP – In the UK, The last week brought relatively good news for the pound. The Bank of England meeting minutes revealed a positive revised growth estimate for the UK on Wednesday, and Retail Sales m/m figures on Friday beat estimates with at least a small sign of growth. The pound has held up against most other currencies and has the momentum to push higher next week. Data to watch for this week from the UK will be the Prelim GDP q/q on Tuesday, Manufacturing PMI on Thursday, and Construction PMI on Friday.

EUR – In the Eurozone, Manufacturing data from last week and an improved PMI figure confirmed that business activity has increased overall. However, with inflation at such low levels, the Eurozone is increasingly concerned with a stronger Euro, which would further destabilize growth. Data is limited this week, but with a CPI Flash Estimate y/y figure on Wednesday, there will be a more complete picture of how prices have increased when compared to economic growth in the region.

USD – Last week, the Dollar provided some resistance to the advancing pound and Euro with positive durable goods orders last Thursday, but much will depend on the preliminary US GDP figure this coming week. This week, the all-important day will be Wednesday, as markets prepare to digest the ADP Non-Farm Employment Change, Advance GDP q/q data on Wednesday out of the US, and the FOMC will make a statement at 7pm GMT. The FOMC is also scheduled to reduce its bond buying by another $10 billion down to $45 billion this week, and with a relatively stable market, it will be easy for the Fed to proceed with this. Also, let’s not forget Thursday, as Janet Yellen will be speaking at a policy summit meeting in Washington D.C.

Canada – Canadian data will also be heavy this week, as the loonie has proved that it has had some forward momentum with positive Core Retail Sales m/m last week. BOC Governor Poloz is speaking this week on Tuesday and Wednesday will bring Canadian GDP m/m figures. The Bank of Canada has been under increasing pressure to lower their benchmark interest rate of 1% since growth has been slower than expected in the past year and the Canadian Dollar has been sliding as a result. 

Australia – Last week, the Australian Dollar was weakened significantly when Australian CPI q/q and the HSBC Flash Manufacturing PMI both came in negatively and undermined the AUD. This week, we could see a similar phenomenon, as there will be CNY Manufacturing PMI on Thursday, expected to improve marginally from a month ago. Also, there will be Australian PPI q/q expected to improve from the last quarter. The Australian dollar has been strengthening from its 2013 devaluation slide, but it seems to have stalled with poor Australian and Chinese data. This week will be an additional focal point to determine the direction of this rate.

End of week forecast

GBP/EUR – 1.2200

GBP/USD – 1.6900

EUR/USD – 1.3930

GBP/AUD – 1.8200

Nicholas Ebisch

Corporate Account Manager

Caxton FX

Chinese economic growth slows, UK unemployment rate falls to a five-year low

Chinese GDP q/y figures beat estimates, but have continued to slow from where they were a year ago. Global equity markets are up on the day because the 7.4% q/y growth out of China beat analysts’ estimates. Forecasters estimated that the Chinese economic data would come in at around 7.3%, as the economy has slowed from a year earlier, but a surprise to the upside is a welcome relief for global markets concerned about the slowing growth of China. Industrial production ytd/y and Fixed Asset Investment ytd/y slowed, but retail sales y/y accelerated in the past year. China’s current GDP growth is very high when compared to most countries in the world, but it pales in comparison to the double-digit GDP growth that it enjoyed for years. Analysts and planners maintain that the world’s most populous country needs to sustain high levels of growth because of the high number of migrant workers and young population entering the job market. This puts pressure on Beijing to strategically invest in more government stimulus to stop the slide of GDP growth.

In the United Kingdom, the unemployment rate fell to 6.9% during the last month. This is the lowest the unemployment rate has been since April 2009. The UK economy continues to surprise on the upside, as the economy looks to be doing very well and ticking back to life. Sterling received a boost against most major currencies this morning when the data was released. The Bank of England announced last year that the threshold for considering an interest rate increase would be 7.0%, however they are unlikely to rush into any definite timeline. As the unemployment rate fell more quickly than expected last autumn, the Bank of England modified their forward-guidance strategy, saying that they will now consider a broader range of economic indicators to assess the overall strength of the economy when deciding whether or not to raise interest rates. Although this does step up the pressure on the Bank of England, it is unlikely that this alone will advance the timeline for an interest rate increase.

Nicholas Ebisch

Corporate Account Manager

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

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

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

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

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

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

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

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

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

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

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

Richard Driver
Foreign Exchange Analyst

Caxton FX

• This post has been prepared by Caxton FX Ltd for information purposes only
• If you would like more information or would like to make a money transfer, get in touch info@caxtonfx.com.

Caxton FX Weekly Round-up and Outlook

Weak UK data puts further downward pressure on the pound

The prospects for a strong return to growth for the UK retail sector in January seemed very reasonable based on anecdotal evidence but Friday’s -0.6% stopped us dead in our tracks. When you combine this with the Bank of England’s Quarterly Inflation Report, which highlighted an outlook of weak growth and persistently high inflation over the next few years, it is little wonder that sterling has failed to bounce back in the past few sessions.

The MPC minutes are released on Wednesday and despite poor economic figures, we believe it is more likely that the lone QE voter David Miles dropped his vote than actually recruiting other members to his cause. The high inflation outlook really doesn’t seem consistent with additional QE, particularly while the Funding for Lending Scheme is providing the UK economy with support. Whilst Sir Mervyn King did state last week that the MPC stands ready to do more QE if necessary, we still believe his doubts over how much more this can achieve will dominate the voting in the coming months.

What hasn’t been helpful to the pound today have been Martin Weale’s weekend comments supporting a weaker pound to aid exports and address the UK’s current account deficit. Some might have interpreted this as a rare foray into the dangerous field of verbal intervention but we doubt it was much more than an example of wishful thinking.

Euro gets away with awful eurozone GDP figures

GDP data from throughout the eurozone, which significantly included Germany, was very disappointing last week. The euro is trading at a three-week low against the US dollar as a result of this confirmation that the eurozone recession is worse than many had feared, but levels above $1.33 are still pretty firm. Meanwhile, the euro continues to bully the pound down below €1.16.  

News out of the eurozone may have been bad last week but hopes are rather higher for this week’s eurozone data. Further improvements are expected within this week’s key German economic sentiment and business climate gauges. Meanwhile, Thursday’s eurozone PMI figures are expected to point to stabilization, even if the region does remain in recession territory.

US dollar enjoying plenty of demand amid firmer data

Recent headlines out of the US have been upbeat; weekly unemployment claims data improved sharply, while manufacturing and consumer sentiment figures also impressed. This provided a timely contrast with awful data out of the UK and the eurozone and may well have reminded many players why the USD should, in our view, be preferred to the EUR and GBP (in spite of QE3). The week ahead brings the minutes from the last Fed meeting (Wednesday), which could well reveal some discussion as to when QE3 can start to be scaled back. The bar remains pretty high in respect to this but discussion alone should be USD-positive.

End of week forecast

GBP / EUR	1.1500
GBP / USD	1.5400
EUR / USD	1.3400
GBP / AUD	1.5100

Sterling is trading below €1.16 this afternoon and we suspect the rate will head lower from here, with levels close to €1.15 representing a realistic target. It continues to prove tricky to call a bottom on GBP/USD’s slide but we think the pair will take a close look at $1.54 before a bounce is in sight.

Richard Driver
Currency Analyst
Caxton FX

Eurozone growth data comes back to haunt the euro

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

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

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

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

Richard Driver

Currency Analyst

Caxton FX

January Outlook: GBP/EUR/USD

The end of 2012 was characterised by euro strength and dollar weakness, with sterling’s performance falling somewhere in between. We have seen GBP/USD rally to fresh highs lately, while GBP/EUR has posted new multi-month lows. Whilst our central scenario is that we will see these two trends reversed over the course of 2013, we note significant short-term risks to sterling vis-à-vis the euro. A weak UK GDP figure for Q4 2012 or a loss of the UK’s AAA credit rating are likely to keep GBP/EUR below €1.25 in the coming weeks, which is significantly below where we see it trading by this time next year.

GBP/EUR

Sterling suffering from UK triple-dip fears

December’s growth data pointed to a disappointing slowdown in November, with the UK’s key services sector only narrowly avoiding a monthly contraction. We have been warned in no uncertain terms by the Bank of England that the UK economy could well have contracted in Q4 2012. The available figures do indeed point to this, even if it is likely to be only marginal. Still, talk of a triple-dip recession is hardly going to foster a mood of confidence towards the UK recovery.

Looking ahead, the near-term outlook for UK growth is likely to be flat, as the economy wrestles with ongoing weakness in demand from the eurozone. We are simply not seeing the rise in UK exports that is necessary and with the eurozone poised to continue contracting throughout the first half of this year, this problem is unlikely to be addressed.

Chancellor George Osborne’s Autumn Statement, delivered in December, told us that the UK government is sticking to its guns on fiscal consolidation, which is likely to continue constraining growth, though we agree that this approach is essential. However, weak growth in combination with Osborne’s failure to make progress on bringing down the country’s soaring debt levels are likely to convince at least one of the major credit rating agencies to downgrade the UK’s triple-A rating. This is a risk for sterling, though we are among those who are sceptical about just how much this would hurt the pound.

In terms of BoE monetary policy, we still only have one MPC member (David Miles) voting in favour of more quantitative easing. The vast majority of the voters appear content to allow the effects of the Funding for Lending scheme to continue feeding through and unless we see evidence of further significant economic weakness, we don’t expect any more QE until at least the second half of 2013. As such, this month’s BoE meeting should yield no major developments, though the release of the MPC minutes on Jan 23 will be as closely watched as ever.

Euro strong but fundamentals point to a decline

As far as the euro is concerned, we have to admit that we are surprised to report GBP/EUR’s recent decline to an eight-month low below €1.2150. Supporting the euro is the fact that Greece is out of the woods for the time being and eurozone tensions have eased accordingly. The key driver of the euro’s resilience, as ever, is the perpetual diversification of USD into EUR by Middle and Far Eastern central banks. 

Nonetheless, we continue to foresee a euro decline through 2013, led by declining economic fundamentals and ongoing eurozone risks. It goes without saying that a weaker euro would benefit the eurozone economy. However, using rhetoric to this effect was a rather dicey move for EU officials last year, amid concerns over the very existence of the euro. We should see greater opportunity for policymakers to take advantage of calmer markets and talk up the merits of a weaker euro this year, without highlighting any existential crisis on the part of the single currency.

In terms of what to look out for this year, elections in Germany and Italy stand out as risk events, as does the likelihood of a Spanish sovereign bailout request sooner rather than later. Fortunately for the euro, Germany doesn’t go to the polls for another nine months, while Greece will likely stay out of the headlines for time being. Longer-term, we do expect the eurozone’s problem child to continue missing its targets, whilst there is also a risk of a breakdown of the Greek coalition.

Political uncertainty in Italy poses one of the most significant risks to the euro in the short-term; elections are likely to be held in March. This should put Spanish bond yields under pressure, as would a Moody’s downgrade of Spanish debt to junk status, which is looking probable based on comments made by the rating agency last October.

Sterling has bounced off its multi-month lows in the €1.2150 region and is currently trading around €1.2350. We expect this pair to remain fairly stable around this level in January, before edging back up towards €1.25 in the coming months.

GBP/USD

US steps away from the fiscal cliff

2013 has kicked off with a bang thanks to the rather predictable eleventh hour deal to avoid the US fiscal cliff. The absence of such a deal would have seen highly damaging tax rises and spending cuts coming into the force on January 1. The US Congress has taken a leaf out of the eurozone’s book by effectively kicking the can down the road but fiscal tightening will nevertheless be a major feature of the US economy this year. The Congressional Budget Office is expecting the US economy to grow by around 2.0% in 2013, which factors in a 1.4% reduction due to spending cuts.

The fact is that nothing of any real substance has yet been decided on American fiscal reform. The next two months will be the subject of further fierce negotiations on what cuts are made and where. The dysfunction of the US political system over recent years almost guarantees a further headline grabbing crisis in the coming months. Indeed, Moody’s and Standard & Poor’s have ramped up the pressure by branding this week’s deal “insufficient.”

Where does this all leave the GBP/USD pair? Well, the dollar has performed remarkably poorly in recent weeks and sterling actually mustered the strength to rally to an impressive fifteen-month high of $1.6380 in early New Year trading. However, the dollar is showing some initial signs of a rebound with this pair having retreated by over two cents from the aforementioned high.

Buying USD above $1.60 remains attractive

Put simply, we have seen any level above $1.60 as a strong opportunity to buy USD for a while now, so current levels of $1.6150 still look highly attractive. We have to admit that this pair finished 2012 significantly higher than we expected, but we remain confident that the greenback will find its feet in 2013. Behind this is a belief that economic fundamentals will acquire a greater share of market focus this year. With the US economy easily outpacing its US and UK counterparts, even after the effects of fiscal consolidation are factored in; increased focus on economic performance should benefit the greenback. In the short-term though, January should provide some more shelf-life for this pair above $1.60.

One month direction:

GBP/EUR: €1.2375

GBP/USD: $1.61

EUR/USD: $1.30

Richard Driver

Currency Analyst

Caxton FX

Osborne's Autumn Statement

George Osborne provided few surprises in his Autumn Statement earlier today. Growth projections for the UK economy were revised down significantly from over-optimistic figures from the March Budget. Tight credit conditions and external dangers will ensure a rocky recovery for the UK economy over the next few years. One notable success though has been the UK labour market, which has showed some strong improvements this year, with 1.2m extra jobs found under the current government. 

A key theme to take from the Office of Budget Responsibility is that the UK is in a weaker position in terms of both growth and its finances, when compared to the last update in March. This of course highlights the risks of a cut to the UK's AAA credit rating in the early months in 2013. In terms of sterling's performance in reaction to the day's events, the response has actually been pretty muted, which is a pretty good result in the circumstances.

Below is a summary of the key announcements made by George Osborne today.

Economy and Government Spending

·         The Office for Budget Responsibility expects GDP to contract by 0.1% in 2012, significantly down from forecasts of 0.8% growth in March. The OBR then expects the UK economy to grow by 1.2% next year.

·         The government’s fiscal consolidation programme is to be extended by another year to 2017/2018.

·         The UK budget deficit is set to fall from 7.9% last year to 6.9% this year.

·         National debt will not begin falling until 2016-17, a year later than previously expected.

·         UK unemployment is expected to peak at 8.3%, lower than initially expected, and employment is expected to rise every year moving forward.

Taxes

·         There is to be no new tax on property (“mansion tax”).

·         40% tax rate threshold will rise from £41,450 to £41,865 in 2014 and then £42,285 in 2015.

·         Corporation tax will be cut by another 1% in 2014, taking the rate to 21%.

·         Inheritance tax will rise by 1% in 2013.

·         Tax free allowance raise is to rise by £235 to £9,440.

·         Planned 3p rise in fuel duty not just postponed but cancelled.

Benefits and Pensions

·         Most working-age benefits to rise by 1% per year over next three years.

·         Child benefits are also to rise by 1% per year over two years from 2014. 

·         Tax relief on the largest lifetime pensions reduced from £1.5m to £1.25m starting in 2014-15, the annual allowance will now be £40k rather than £50k. 

Weak growth outlook hurting the euro today

How quickly the market has moved on from President Obama’s re-election! Focus is back squarely on the eurozone and sterling has enjoyed another nudge higher against the euro as the latter has been sold-off quite aggressively.

What’s behind this fresh euro-weakness? German industrial production data for the month of September has come in at an alarming -1.8% this morning, which represents a five-month low. To make things worse, eurozone retail sales data also revealed an unexpected contraction this morning.

The EU Commission has also added extra weight to the single currency, by releasing pessimistic growth forecasts for the eurozone.  It sees eurozone GDP shrinking by 0.4% this year, before growing by just 0.1% next year. Greece is to contract by a staggering 6.0% this year and by another 4.2% next year. EU Commissioner Rehn sounded distinctly downbeat in his press conference today, citing tightening credit conditions and weakening demand.

GBP/EUR climbed to a five-week high of €1.2530, whilst EUR/USD fell to nearly a two-month low of $1.2735. We have been citing downside risks to the euro on the basis of the eurozone’s dire economic outlook for some time now. The increasing evidence of Germany’s decline is making the market stand up and take notice. Watch out for tonight’s Greek austerity vote, as the euro could get some relief if, as it should do (though only just), the Greek parliament approves the latest austerity proposals. 

Richard Driver,

Currency Analyst

Caxton FX

November Outlook: Euro set to decline

After some weak figures from the UK economy to kick October off, we have enjoyed a pretty steady flow of positive domestic news. The highlight has been the recent preliminary UK GDP figure for Q3, which indicated growth of 1.0%, almost doubling expectations. With headlines surrounding the UK economy’s emergence from recession, sterling has enjoyed some renewed interest, though with domestic growth so far this year almost completely flat, you don’t have to look far to find the sceptics.

As far as the US economy is concerned, conditions are certainly perking up. The recent advance US GDP figure for Q3 revealed annualised growth of 2.0%, so it was a case of anything the UK can do, the US can do better.  The Fed will also be encouraged by significant improvements in the US labour market. It appears that the recovery of the world’s No.1 economy from its mid-year slump, albeit later than expected, is well under way. Nonetheless, the risk of the US fiscal cliff continues to pose serious threats to US and indeed global growth in 2013.

It has been fairly quiet on the eurozone front in recent weeks. Spain remains frustratingly tight-lipped on the issue of a bailout request. However, we are heading into a crucial week in which the Greek parliament will decide whether or not to approve an austerity package that is essential to the release of the country’s next tranche of aid.

GBP/EUR

Sterling benefits as UK exits recession

Sterling spent much of October under pressure against the euro, with no major panic headlines emerging out of the debt crisis. Disappointing domestic data also kept sterling pinned well below the €1.25 level for long periods, with the services, construction and manufacturing sector updates all disappointing.

However, we have seen a decent turnaround in figures in the past fortnight or so, which has provided sterling with renewed support. The labour market continues to make impressive strides, as shown by the unexpected dip in the UK unemployment rate to a 13-month low of 7.9%, while retail sales were also in good shape in September. These figures were topped off by a 1.0% preliminary UK GDP figure, which was well above the 0.6% estimates that were prevailing in the build-up. With the data revealing that the negative growth that dominated the first half of the year has been recouped, the UK government enjoyed a rare sigh of relief.

MPC to vote against QE this month

This all leaves the Bank of England interestingly poised in terms of its next move. MPC members have been quick to warn that we can expect a much weaker growth figure from the fourth quarter, once the temporary factors of the Olympics and the bounce back from the extra Q2 Jubilee bank holiday are discounted. However, judging by the minutes from last month’s MPC meeting, not only is the MPC split on the desirability of another dose of quantitative easing, but there appears to be plenty of scepticsm with respect to the usefulness of such a move. In addition, there have been hints that the government’s Funding for Lending initiative, where bank lending is incentivised, is making a real difference.

There is plenty of reason to suspect that last quarter’s GDP figure was a temporary surge for an economy that still needs nurturing back to health. The latest updates from the services sector suggests the UK has made a soft start to Q4 but we nevertheless expect the MPC doves to fail to muster a majority vote in favour of QE this week.

Greece vote gets euro nerves jangling again

As far as the euro is concerned, focus has centred on the familiar issues of Greece, Spain and deteriorating eurozone growth. Greece will dominate the eurozone headlines this week, with PM Samaras presenting a controversial package of fresh austerity measures which will be voted on by the Greek parliament later this week. The vote will come right down to the wire, though we are expecting the package to be approved.

We are sticking to the ‘muddling through” assumption that Greece will do what is demanded of it and in turn will receive some concessions, along the lines of lower interest rates, extended loan maturities and extended austerity deadlines. The stakes are simply too high to allow the Greek saga to blow up again.

With Spanish bond yields coming away from the dangerous 7.0% mark in the aftermath of ECB President Draghi’s pledge to buy up unlimited peripheral debt, the pressure on PM Rajoy to request a bailout has eased somewhat. However, the market is likely to take an increasingly dim view of Rajoy’s ongoing procrastination through November (talk has emerged that he will wait until next year). Ratings agency Moody’s handed Spain some breathing space last month, sparing it the blow of downgrading its debt to ‘junk’ status but there is little doubt it will wield its axe once again if progress fails to emerge.

As ever, major concerns are stemming from the deteriorating state of eurozone growth, as the region is dealt round after round of austerity. Whilst the ECB now looks set to hold off from cutting interest rates until next year, declining demand from peripheral eurozone nations continues to filter into weakness in the eurozone’s core. German figures were yet again poor in October, compounding fears that the powerhouse economy is heading into recession. The region’s declining economy is really showing few bright spots, while the headlines out of the UK economy contrastingly highlight its re-emergence from recession.

Sterling is trading just below the key €1.25 (80p) level and direction from here over the coming weeks will really depend on whether the pound can make a sustained move north of this benchmark. We can’t discount another move back down towards €1.23 but we maintain expectations for this pair to move above €1.25 in the coming weeks.

GBP/USD

Dollar to benefit from upturn in US growth

Sterling has traded very positively against the USD in recent weeks but has finally suffered a downward correction in the past week. GBP/USD is still only a couple of cents off April’s multi-month highs above $1.62 with stronger UK data and diminishing risks of QE providing the pound with plenty of support at $1.60, just when a move back down to the $1.50s has looked on the cards.

The USD is attracting increased demand at present on the back of some strong US economic figures. The US unemployment rate fell to 7.8% in September, the lowest level seen in almost four years (though this bounced up to 7.9% in October). The advance US GDP figure for the third quarter came in above expectations at 2.0% (annualised), powered by a surge in consumer spending and a temporary boost from defence spending. November’s excellent employment update, suggests we can expect further improvements over Q4.

Global concerns to highlight dollar’s safe-haven status

With the fiscal cliff a month closer, so too are the risks of a massive hit to US growth. This in our view will increase appetite for the safe-haven US dollar as we approach year-end. Meanwhile, we are struggling for progress on the Spanish debt/growth problem and broader concerns with global growth should also underpin the greenback.

Whilst the US Federal Reserve is engaging in QE3, the US economy is still outpacing the UK by some distance and we believe this will soon be reflected in some dollar strength. The UK’s last GDP figure may have been impressive (1.0% in Q3) but looking at the year to date, growth has essentially flat lined and with the eurozone recession deepening, major risks to domestic growth remain.

This week’s US Presidential election makes short-term swings highly probable and highly unpredictable. Not only is it unclear how the dollar will react to whoever wins but there is also the issue of which party will control Congress. Our conservative bet is that the status quo will broadly remain, with Obama emerging victorious but with doubts remaining over his ability to strike a deal to avert the fiscal cliff. We maintain our position that that we will see this pair spend most of the rest of the year below $1.60. Sterling’s two-month low of $1.5920 should be tested soon and we believe this will ultimately be broken, paving the way for move back into the mid-$1.50s.

1-month Outlook

GBP/USD:  1.58

GBP/EUR: 1.2550

EUR/USD: 1.26

Richard Driver 

Currency Analyst

Caxton FX

Germany succumbing to peripheral eurozone weakness

Today’s session has seen some nasty eurozone growth data emerge, which has put the euro under even more selling pressure. Yesterday’s was a tough enough session for the single currency thanks to Moody’s credit downgrade to five Spanish regions; sterling/euro has helped itself to some very welcome gains again today.

Attention as far as the euro has been concerned has been focused on Spain’s “imminent” bailout request and Greece’s slow progress towards an agreement on further austerity measures that will unlock the next tranche of aid. Focus switched back to economic fundamentals today, which is not an environment in which the euro has thrived in recent months thanks to the regional downturn in economic growth. Brutal austerity measures throughout the eurozone periphery are not just hurting those struggling economies, the weakening demand is hitting the eurozone’s core, as shown by today’s German and French growth data.

September’s German manufacturing data suggested the weakness we have seen in the sector this year had bottomed out but October’s downturn casts a shadow over this theory. France’s manufacturing number came in below expectations, as did that of the German services sector.

A key gauge of the German business climate showed a sixth consecutive monthly decline, giving its worst showing since March 2010. What is interesting is that Ifo, the institute which produces the business climate survey, does not see any need for the European Central Bank to cut interest rates and does not see Germany heading into recession.

We are rather more bearish on the prospects of the European powerhouse. The composite measure of eurozone output has fallen to a 40-month low and points to an even sharper contraction in Q4 compared with Q3. Germany’s resilience to the eurozone region’s decline is a thing of the past and we are expecting a rate cut from the ECB in the coming months. The ECB might be doing its bit to ease concerns over eurozone contagion and a break-up, but growth in the region is crying out for help. 

Richard Driver

Currency Analyst

Caxton FX

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

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

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

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

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

Big week of UK announcements ahead 

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

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

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

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

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

Richard Driver
Currency Analyst
Caxton FX

What the fiscal cliff could mean for the US and global economy

With the US fiscal cliff less than three months away, the International Monetary Fund has chimed in this week with its concerns for both the US and the global economy as a whole. The US is edging towards an enormous fiscal tightening the like of which we haven’t seen since 1947. The nerves, pressure and speculation surrounding the issue will only going to intensify as US politicians argue and stall their way through the final quarter of the year.

The IMF has estimated that if a deal isn’t reached to avoid a full-blown fiscal cliff, then the US could well plunge into recession next year. The organisation estimates that the US economy will grow by 2.1% in 2013, while the impact of the fiscal cliff would weigh on GDP by 2.2%.

While the fiscal cliff does not appear to threaten a global recession next year, it would certainly have a significant impact; rating agency Fitch has estimated that it would cut global growth in half. As far as eurozone growth is concerned, developments from within the region could easily tip the IMF’s 2013 eurozone GDP forecast of 0.2% well and truly into recession territory regardless of the fiscal cliff. However, the organisation sees the failure to reach a compromise on the fiscal cliff knocking 0.4% off growth, which would seal the deal regardless.

If an agreement between the Republican controlled Congress and Democrat controlled Senate, it is highly unlikely that the payroll tax cut will be extended - there appears to be consensus on this issue. The expiration of this tax cut then will likely shave 1.0% off US GDP, which is nearly half the amount that the IMF is estimating of a full-blown fiscal cliff. This would leave global growth down around 2.6% in 2013, instead of the 3.6% the IMF is anticipating on the assumption a deal is reached. Unless US politicians pull a rabbit out of their collective hat, the fiscal cliff issue is likely to end in pain for all concerned, just how much pain is the real question.

Richard Driver

Currency Analyst

Caxton FX 

October Monthly Outlook: GBP/EUR and GBP/USD

Sterling to benefit from resurgent UK economy

From the eurozone, September’s two key events were ECB President Draghi’s announcement of his long-awaited bond-buying plan and the German Constitutional Court’s decision to approve the permanent bailout fund. Since then, there has been a real lack of any further concrete developments, which has understandably frustrated many market players and caused some risk aversion. As the next major event in the timeline of the eurozone debt crisis, speculation over the imminence of a Spanish bailout request is dominating market thinking at present. PM Rajoy does not actually appear to be much closer to making a formal request; he looks likely to wait until after Spanish regional elections to be held on October 21.

From the US, we have finally seen Ben Bernanke deliver what the market has been waiting for – more support for the US economy in the form of QE3. The move was priced in to a large extent but the dollar has been unable to stage any significant recovery in the immediate aftermath of the Fed’s announcement.

Conditions here in the UK continue to look a little brighter, though understandably many investors will still need further positive evidence to be truly convinced that the economy is on a path to a sustained recovery. However, with the Japanese and US central banks engaging in QE in September and the European Central Bank also taking monetary easing measures of its own (though rather more unconventional), the market is beginning to look more favourably upon the pound again.

GBP/EUR

Spanish delays will hurt the euro

Sterling has made a decent recovery against the euro in recent weeks, after what was quite a sharp decline as a result of the optimism that followed the announcement of the ECB’s bond-buying plan. There has been a positive response to some of the UK figures that have emerged in recent weeks; trade balance data revealed a dramatic rise in exports to destinations outside the EU, suggesting UK businesses are adapting to deteriorating eurozone demand. Meanwhile, UK unemployment figures continue to defy the overall weak picture of UK economic growth by making significant strides. From retail sales data to public sector borrowing figures, the UK economy has been beating market expectations time and again and this is filtering into some sterling strength. Another positive has emerged with the latest upward revision to the UK’s Q2 GDP figure to -0.4%, considerably better than the original estimate of -0.7%. Hopes are high for a very strong showing for the Q3 UK GDP figure released on October 26.

The minutes from the MPC’S September meeting revealed a unanimous vote against further QE (for now). The decision in favour of leaving the BoE 0.5% base rate unchanged was also unanimous. The fact that one MPC policymaker saw a good case for QE in September did not go unnoticed but as things stand, the Bank of England is understandably in wait-and-see mode. In light of the increased room for domestic optimism and the easing of financial conditions in the eurozone in recent weeks, it will not come as much of a surprise to learn that we are not expecting any fresh monetary easing measures from the Bank of England this month. November is likely to see the Bank assess its options much more carefully though.

Coinciding with strong economic figures has been an increased appetite for the pound as a relative safe-haven. Gilt yields have declined in recent sessions as investors attempt to take cover from renewed uncertainties from the eurozone and as usual this has boosted the pound by association. With the QE decisions from the US Federal Reserve and the Bank of Japan in September, sterling has climbed a little higher up many investors’ wish lists in recent weeks.

Putting improved UK conditions to one side, the major factor behind GBP/EUR’s climb in the past month has been a shift in sentiment against the euro, as is predominantly the case when this pair climbs. The market relief that followed the ECB’s commitment to buy unlimited quantities of distressed peripheral debt has well and truly worn off. Investors have refocused on the major issues facing Spain and Greece in particular.

PM Rajoy has thus far snubbed the opportunity to take advantage of the ECB’s offer to purchase Spanish debt, fully aware of the austerity demands that will accompany such intervention. Rajoy is under enormous pressure domestically, with the rich Catalonia region demanding independence and fierce protests taking place in Madrid over existing austerity measures. The market is likely to have to wait until after regional elections held on October 21 for Rajoy to bite the bullet, which leaves a good three weeks of frustration ahead. That said, if rating agency Moody’s cuts Spain’s credit rating to ‘junk’ status, then a spike in Spanish bond yields could force Rajoy’s hand a little sooner.

Greek saga remains volatile

The situation in Greece also remains typically uncertain. October is an important month too, with some chunky bond repayments maturing. Disagreements not only exist between Greece and the Troika (EU, ECB and IMF) but between the IMF and the EU. With the Greek debt profile blown even further off track by a deeper than expected recession, the IMF is now pushing for another Greek debt restructuring in order to get its debt sustainability back on track. Unsurprisingly, more ‘haircuts’ is not at the top of the EU’s list of priorities.

It looks as if there is some consensus over giving Greece an additional two years to meet its targets and the government appears to have been reached an agreement for €13.5bn in additional spending cuts that they hope will unlock the vital next tranche of aid. However, the agreement still needs Troika approval and would need to be approved by the Greek parliament, which amid violent public protests in Athens is no dead cert. Speculation has surrounded the need for a third Greek bailout but this option looks to be a non-starter as it would require parliamentary approval from individual member states. The bottom line is that Greece may well leave the eurozone but EU leaders are unlikely to let this happen while conditions in Spain remain so tense. The pressure for stronger signs of progress will be turned up once again at the next EU Summit on October 18-19.

Sterling has recouped its mid-September losses against the euro and is back trading above the €1.25 level. With market confidence so shaky at present, any concrete progress - most importantly from Spain in the form of a bailout request – will likely give the euro a significant lift. However, our baseline scenario is that this will not occur and that sentiment will continue to weaken towards the euro, helping sterling to build on its domestic economic resurgence and resume its uptrend against the euro.

GBP/USD

Dollar to strengthen despite QE3

The US Federal Reserve finally pulled the trigger on QE3 in September, which meant it was another very soft month for the US dollar. There have been some bright spots amongst US figures in the past month, with trade balance, retail sales and consumer confidence figures all showing some improvements. However, there has been plenty of evidence of continued economic weakness to support Ben Bernanke’s decision to turn the printing presses back on; last month’s key employment update gave little to cheer about. In addition, the final US GDP figure for Q2 was sharply and unexpectedly revised down to 1.3% from 1.7%.

The issues of weak US economic growth and a long period of quantitative easing are by no means at the top of most investors’ list of concerns. The US dollar has strengthened a little in the past fortnight, amid waning euphoria surrounding the QE3 announcement and the ECB’s pledge to purchase peripheral debt. Spain has not asked for a bailout, Greece has not secured its next tranche of aid and growth across the world is slowing. These are all dollar-friendly factors and the slowdowns being seen in China and the eurozone (including Germany) are of particular concern.

Whilst UK growth data has been remarkably positive in recent weeks, the ongoing fragility of the UK recovery has already been highlighted this week by a weaker than expected manufacturing figure. If sterling is to avoid another short-term sell-off against the US dollar, the UK services figure released on October 3 must be firm. However, sterling should get plenty of support in the form of the preliminary Q3 UK GDP figure released on October 26; we are looking for a robust quarterly showing of around +0.6%.

As things stand, sterling is trading almost two cents below September’s 13-month high of $1.63 and we think this high will remain a ceiling for this pair. Regardless of QE3, we see plenty of scope for increased demand for the safe-haven US dollar. We are still anticipating weakness in the EUR/USD pair, which should send GBP/USD back below $1.60 in October. 

Richard Driver

Currency Analyst

Caxton FX

UK Q2 GDP contracts by less than expected: things are looking up

The final UK GDP figure has been announced this morning and the news was very good; the UK economy only contracted by 0.4%, less than than the previous -0.5% estimate and considerably less than the original -0.7% reading. So in simple terms, the UK economy was only around half as bad as first thought in Q2. An upward revision to the construction sector’s performance is a key cause of the upward revision.

The Bank of England reckons that the extra bank holiday for the Queen’s Jubilee in June cost the UK economy as much as 0.5%, so underlying growth could actually have been positive in Q2. There is a big difference between stalling growth and deepening recession. Today’s upward revision really dovetails with what Mervyn King has been saying for the last few months. The figures released by the Office of National Statistics (the GDP figures) have underestimated UK growth, or at least overestimated the impact of the Jubilee bank holiday.

UK figures have been showing some significant improvements this summer, helped by the Olympics, and MPC member Fisher has commented today that we can expect a “very strong” GDP reading for Q3. In fact, we are expecting Q3 growth to more than make up for Q2’s contraction, perhaps showing a reading as high as 0.7%.

Of course, downside risks should be noted and the UK is a long way from being out of the woods and free from recession fears. The eurozone debt crisis continues to pose a threat to our banking system and it is certain that eurozone growth will be more or less non-existent next year. Nonetheless, this morning’s figure is good news and October 26 will bring more in the form of a robust preliminary Q3 GDP reading. All good news for the pound, which has already enjoyed a rally today, trading above €1.26 and $1.62. 

Richard Driver

Currency Analyst

Caxton FX

Will the ECB cut interest rates next week?

Away from what’s going on in Spain and Greece, let’s take a look ahead at next week’s ECB meeting. This week’s key German business climate figure was awful and the significance of this will certainly not have been lost on the ECB. With economic contraction throughout the periphery weighing on growth in the eurozone’s powerhouse economy – will the ECB finally put its deeply engrained fear of high inflation to one side and give Germany and perhaps more importantly the rest of the eurozone a helping hand by lowering interest rates?

A German contraction in Q3 is not a certainty but it is now looking likely, particularly in light of the latest German confidence figure, which hit its lowest reading since March 2010. Spain’s central bank warned yesterday that its economy’s GDP continued falling at a “significant rate” in Q3, while S&P forecasted that Spanish GDP will contract by another 1.4% in 2013 and the eurozone economy a whole will achieve zero growth. With conditions so dire in Germany’s major eurozone trading partners, you don’t have to dig too deep to find motivation for a rate cut.

Domestic consumption, which accounts for around 60% of German GDP, is in good shape and consumer confidence remains stable. Admittedly, other domestic German indicators such as the ZEW and PMI surveys also suggested things are not so bad but we can probably put this down to temporary positivity triggered by the ECB’s bond-buying plan. The German business climate survey has built up a strong correlation with German GDP, which leads us to believe a Q3 contraction is on the way. Weak exports are likely to outweigh robust domestic demand.

Still, the ECB seems unlikely to cut interest rates next week. The ECB appears to have already factored in further weakness in eurozone growth; recently projecting a 2012 GDP contraction of between -0.6% and -0.2%. This latest poor figure from Germany probably does little to change the ECB’s approach. Indeed Draghi acknowledged a weaker business cycle in his September ECB Press Conference.

In addition, the ECB’s Nowotny has recently stated that he “sees no need to change interest rates in the eurozone currently.” ECB policymakers have also been lauding the positive response in the financial markets to the ECB’s bond-buying plan, suggesting they are satisfied with the 0.75% interest rate at present. Draghi will also be eager to keep the German ECB policymaker Weidmann on side by waiting until a rate cut is absolutely necessary, when German growth has completely ground to a halt and inflation has eased further. This is likely to happen later on in Q4, perhaps in December. The euro is certainly feeling the pressure at present but it will likely be spared the downside factor a rate cut for the time being.

Richard Driver

Currency Analyst

Caxton FX

Caxton FX Weekly Round-Up: Spanish bailout issue to weigh on euro

Market frustrations with Spain on the rise

Spanish PM Rajoy’s failure thus far to accept the inevitable and make a formal request for a bailout has weighed on the euro in recent sessions. The week ahead brings plenty of interest; we are due to see Spain’s draft budget for 2013, the results of the Spanish banking sector’s recent stress tests and an economic reform programme that is likely to be a prelude to a bailout package. Even if these developments are welcomed by the market, we still think that Rajoy will wait until after Spain’s regional elections on October 21, which leaves several more weeks of uncertainty and frustration. This should delay any further euro rallies.

On the Greek front, we have seen some alarming headlines that the budget deficit is nearly twice as large as initially estimated. Talks between Greece and the Troika are now on a one week hiatus, so the market is left with alarming rumours of the need for a third Greek bailout and another Greek debt restructuring. The option of granting Greece more time to meet its bailout targets is gaining support but at this stage we are very much in speculation territory.

Concerns over eurozone growth have returned to the fore this week, after another awful German business climate survey. The risks of a German recession are rising, a development which the periphery can ill-afford.

Sterling firm ahead of final GDP number

The pound is performing well across the board at present. Eurozone concerns have returned after an August lull, while the central banks of Japan and the US have both eased monetary policy further, leaving sterling to reap the rewards. In addition, UK data has improved in recent weeks and the BoE seems to be content for the time being to delay any further QE of its own.

Sterling should be able to hang on to its recent gains against the euro and perhaps even build upon them, provided that Thursday’s final UK GDP number for Q2 does not suffer a downward revision to the already worrying   -0.5% reading. This release, which is likely to remain unrevised, is the only major event on the domestic calendar this week. By and large, the market’s gaze will be firmly fixed upon Spain.

US dollar soft after QE3 decision but continues to look poised for a bounce

Sterling remains at heady heights close to a 13-month high against the US dollar, thanks in no small part to the Fed’s decision to do a third round of QE earlier this month. However, the dollar’s behaviour since the decision suggests the move was more than a little bit priced in. Certainly the pound has climbed against the greenback but it has really stalled at the $1.63 level, so much so that we expect the rate to fall back in the coming weeks (provided that Rajoy doesn’t surprise us with an early bailout request)

End of week forecast

GBP / EUR	1.2625
GBP / USD	1.6150
EUR / USD	1.2800
GBP / AUD	1.5600

Risk appetite is pretty weak at present and the flow of news out of the eurozone is predominantly very negative. There remain disagreements over the EU banking union, over the legality of the ECB’s bond-buying programme, over the cession of Catalonia from Spain and much more besides. With this in mind, the GBP/USD rate’s ceiling of $1.63 looks likely to hold firm in the coming sessions. Meanwhile against the euro, sterling looks better placed to climb further. A move back up above €1.26 is a likely one this week.

Richard Driver

Currency Analyst

Caxton FX