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

Caxton FX Currency Round-Up: GBP/EUR, GBP/USD

Euro under pressure as ECB indicates cut to deposit interest rates 

The euro has been hit by a few different factors in the past few sessions. ECB President Draghi gave the single currency a knock last Thursday by revealing that whilst there would be no change to the Bank’s policy this month, we might expect some monetary easing next year. From Draghi’s comments, we no longer draw the conclusion that the ECB will cut the headline interest rate in Q1 next year. However, there were real indications that if growth disappoints and eurozone nerves spike in the coming months, we could see a cut to the deposit rate in a bid to encourage banks to step up lending.

Both the ECB and the German central bank (the Bundesbank) have delivered some fairly gloomy growth predictions in the past week. The former now sees the eurozone economy contracting by 0.3% next year, after previously predicting growth of 0.5%. Meanwhile, the Bundesbank disappointingly slashed its forecasts for German growth next year; reducing its June forecast of 1.6% growth to 0.4%.

We have had some good news today on the German front however, with a key economic sentiment survey hitting a seven month high. The latest sentiment and confidence surveys out of Germany suggest the country may narrowly avoid a recession, though a contraction in Q4 2012 looks highly likely. The German economy may not be in as weak as many had expected but the hopes for the rest of the eurozone are rather dimmer. This could well be highlighted by Friday morning’s eurozone PMI growth figures.

Italy hits the headlines as PM Monti announces resignation plans

Technocratic Italian PM Mario Monti dropped a bomb over the weekend by announcing his intention to resign once the Italian parliament has passed its 2013 budget. Berlusconi is waiting in the wings but his approval ratings suggest this is too big a mountain for even him to climb. Nonetheless, this political uncertainty - which raises serious question marks over Italy’s ability to deliver the necessary cuts and economic reforms to keep bond yields stable - could weigh on the euro significantly in the coming weeks and months.

All eyes on US Federal Reserve QE decision

Last week’s surprisingly strong figures from the US labour market are unlikely to satisfy the US Federal Reserve at its meeting over the next two days. We expect the Fed to decide to replace Operation Twist (which is set to be concluded) with a further $40bn in asset purchases, to bring its QE programme up to $80bn per month. There are various tweaks that the Fed can make to its monetary policy, to which the US dollar will respond differently. Given that sterling is trading at a very healthy rate of $1.61 at present, we would urge dollar-buyers to act now.  

End of week forecast

GBP / EUR	1.2450
GBP / USD	1.60
EUR / USD	1.29
GBP / AUD	1.53

Sterling has enjoyed a welcome little recovery against the euro amid some rather negative eurozone developments. At €1.24, we have not abandoned hopes of one last push for €1.25 before the end of the year. There is not much to get excited about with respect to sterling at present but we do expect enthusiasm towards the euro to wane from here. A move below €1.23 is looking increasingly unlikely.

Richard Driver
Currency Analyst 
Caxton FX

Caxton FX Weekly Outlook: GBP/EUR/USD

UK GDP figure strong but reality check could be around the corner

Last week’s Q3 UK GDP figure beat expectations by some distance (1.0% vs 0.6%), which triggered plenty of sterling demand. The boost from the Olympics and the natural rebound from the extra bank holiday that weighed on growth in the second quarter suggest that the economy has recouped the 0.9% contraction that we saw in the first half of the year.

The much better than expected GDP figure is certainly good news but if we take a step back, the truth is that the UK economy has done little more than flat line in 2012 so far. Since the release, MPC members have been quick to manage our expectations for Q4. Indeed, we are likely to see some weak growth figures in the week ahead in the form of the monthly updates from the UK manufacturing and construction sectors, which threatens to knock the pound off its perch against the dollar in particular.

Despite the scepticism with which many are looking upon the GDP figure, we do see it as likely to convince the BoE not to announce another round of QE at its monthly meeting next week. Whilst there is clearly a pro-QE voice within the MPC, we just doubt that the doves will be able to form a majority next week.

US growth in better shape ahead of key monthly employment data

Friday brings October’s US non-farm payrolls figure, which is expected to show some further modest improvement. This, in combination with last week’s forecast-beating US GDP figure (which indicated that the US economy grew at an annualized pace of 2.0% in Q3) may well give global stock markets a lift, taking away some demand from the safe-haven US dollar. As things stand however, fears over Hurricane Sandy have instilled in the markets a distinctly cautious tone at the start of this week, which has kept the EUR/USD pair pinned down below $1.30.

The US dollar has certainly been on the ascendancy in the past week, as frustrations over a lack of progress in Spain and Greece have set in. The former country appears no closer to requesting a bailout, something which is clearly testing the markets’ patience by the look of rising Spanish bond yields. Also weighing on the euro last week were some very disappointing German economic figures – this weak growth story running behind the debt crisis is a key driver behind our negative outlook for the euro in the coming months. We have had some poor German employment data out this morning, which has been a source of concern, though the euro has been given a helping hand today by a positive Italian bond auction.

End of week forecast

GBP / EUR	1.2400
GBP / USD	1.5950
EUR / USD	1.2860
GBP / AUD	1.5550

Sterling is trading at €1.24 this morning and faces a difficult end to the week in the form of domestic growth data at the end of the week. We see EUR/USD paring back from its current $1.2950 level, which should help GBP/EUR fall no lower than €1.2350. We still fancy a move above €1.25 in the coming month or so, which could actually bring a move significantly higher into sight provided the BoE holds off from further QE.

GBP/USD’s rallies are running out of steam at early stages and a sustained move below $1.60 is still our best bet.

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

German confidence tumbles again, pointing to possible German recession

A monthly German survey, which covers around seven thousand firms, has been released this morning to reveal that German business confidence has declined for the fifth consecutive month. A flat reading was expected but German business confidence has now dipped to its weakest level seen since March 2010. The news provides further evidence of the dampening effects of the eurozone debt crisis on the region’s powerhouse economy and has accordingly weighed on the single currency today.

Firms in manufacturing, construction, trade and industry were mostly responsible for the poor climate reading, though retail and wholesale trade did improve slightly. The regional downturn is having a particularly noticeable impact on Germany’s exports to other eurozone nations. The economic weakness being seen in major nations like Spain, Italy and even France cannot be viewed in isolation; recessions are particularly contagious in a currency union like the eurozone and this morning’s data indicates that Germany is succumbing.

Interestingly though, an economist from the producers of the data - the Institute for Economic Research - has stated that German consumption remains robust despite a weaker labour market and therefore does not see a need for an interest rate cut from the European Central Bank. An interest rate cut would however weaken the euro, which could boost exports outside the eurozone, though this would require Germany’s preoccupation with high inflation to be set aside. The IFO economist did also note that the survey was taken prior to the positive decision from the German Constitutional Court earlier this month, the uncertainty surrounding which may be at least partly responsible for the unexpected decline.

The economic downturn is not just bad news for Germany but for the eurozone’s peripheral nations as well. If Germany enters recession, then it is going to be increasingly difficult for Merkel to justify and deliver the support she is pledging for struggling nations like Spain and Italy. With plenty more austerity measures still to come across the eurozone, the prospects for the economy as a whole and Germany by association, are rather gloomy. After Q2’s 0.3% GDP growth, Germany may avoid economic contraction in Q3 but the same is unlikely to be true in Q4, such is the downtrend that is in place. This is not to say that Germany is certain to enter a recession but the risks are very significant and it is looking increasingly likely, which is bad news for all concerned.

We may have seen some progress on the debt crisis in the last month or so but economically, the region is in very poor shape indeed, which is in part why we maintain a negative outlook for the euro.

Richard Driver

Currency Analyst

Caxton FX

The German Constitutional Court gives the euro another boost

After weeks and week of delay, Germany’s top Constitutional Court has ratified the European Stability Mechanism - the eurozone’s permanent bailout fund. The court ruled that the ESM does not conflict with the German constitution and Italian PM Mario Monti has today stated that this “has removed the last obstacle for the implantation of the ESM treaty and the fiscal compact treaty.”

There are a few ‘buts’ though, which probably means Monti is jumping the gun a little. Whilst the ESM treaty does oblige the German government to contribute €80bn up front and further contributions upon bailout requests down the line, the German court has limited Germany’s contribution to €190bn. This is a significant condition and may prove to be insufficient given the refinancing needs of Spain and Italy. Italy could potentially decide to it is unable to contribute to the ESM due to the state of its own finances - Germany is unlikely to step willingly into the void. In addition, the court rejected granting the ECB a banking license and in doing so highlighted a continuing lack of firepower.

However, Germany's liability could be increased with the approval of the Bundestag, though such approval seems unlikely given the momentum of bailout-fatigue sentiment among the electorate. Another condition was included that both German House of parliament must be kept informed of ESM decisions, which does have the potential to delay future decisions.  

The ESM’s governing board will meet in early October for the first time but Eurogroup head Juncker has said it will not be activated before January 1, 2013. The euro has rallied again today, focusing on the disaster that was avoided rather than the considerable issues that remain. The euro may be to climb a little further on the back of a QE3 announcement tomorrow evening but it is fair to say this rally is looking increasingly overextended. 

Richard Driver

Currency Analyst 

Caxton FX

Caxton FX Weekly Outlook: Further upside potential for euro

ECB plan triggers euro rally

Mario Draghi alluded to doing “whatever it takes” to save the euro a month or so ago and at last week’s ECB press conference, he outlined just what he meant by that. ‘Super Mario’ as he has been called, revealed a plan that involves the ECB purchasing unlimited amounts of peripheral eurozone nations’ bonds. This has already brought down Spain’s bond yields but as Moody’s has warned today, this does not solve the crisis, it merely buys EU politicians (and not the ECB) the time to address the region’s fiscal and structural shortcomings.

The ball is now effectively in Spain’s court to negotiate acceptable conditions of a bailout that would include ECB intervention in the bond markets. So we are back to the familiar balancing act of Germany extracting sufficient austerity measures without going ‘over the top.’ This could potentially weeks but there is plenty to watch out for in the interim.

Wednesday should bring the German Constitutional Court’s ruling on the legality of the European Stability Mechanism and the eurozone’s fiscal compact. The court is strongly expected to approve both initiatives but a complaint made today by a German MP regarding last week’s ECB bond-buying plan has raised the prospect of another possible delay to the decision, which has ramped up market nerves again.

Wednesday also brings the Netherlands' general election but the euro looks likely to be spared another political saga at this stage, with the latest polls indicating a close race between two pro-Europe parties.

QE3 could finally arrive this week

Going into last Friday’s non-farm payroll figure the chances of the Fed delaying QE3 for the time being were fairly well balanced but it now seems highly likely that Ben Bernanke will at last pull the trigger on Thursday. Ironically, data did reveal that the US unemployment rate did fall to a rate not bettered since January 2009. Unfortunately as the employment change figure revealed, this was not because more jobs has been taken up and will be of little comfort to the Fed. QE3 is priced into a decent extent after Friday’s dollar sell-off but there is every chance we could see another wave of risk appetite give the greenback another knock this week.

Hints of a Q3 rebound for the UK economy

 August’s PMI growth figures from the manufacturing and services sectors were much better than expected last week. In addition, data also revealed that UK manufacturing and industrial production grew at their fastest rates in 10 and 25 years respectively, bouncing back from June’s slump. This summer’s London Olympics also look likely to have made quite a sizeable contribution to the domestic growth, which has caused many to revise up their GDP forecasts for Q3. All this means that QE concerns should not apply any weight to the pound for the next few weeks at least.

Although the euro’s upward climb has stalled today, the prospect of QE3 from the Fed and a positive ruling from the German Constitutional Court could well give the single currency some further strength. This is likely to keep the GBP/EUR pinned close to or even temporarily below the €1.25 level. Against the USD, matters are rather different as the pound currently sits only marginally off a near-fourth month high. Renewed upside potential for the EUR/USD pair could well help the GBP/USD hang on to these gains in the short-term but we continue to expect a reversal in the coming weeks.  

End of week forecast

GBP / EUR	1.2450
GBP / USD	1.6050
EUR / USD	1.2890
GBP / AUD	1.5300

Richard Driver

Currency Analyst

Caxton FX

Sterling set for a tough month

As has been the case for many months, eurozone concerns dominated market sentiment in July, so much so that the euro hit fresh multi-month lows across the exchange rates. Immediate concerns over the situation in Spain and Greece hurt confidence significantly, with weak economic growth across the globe adding to concerns. However, market sentiment and the euro have picked up considerably in recent sessions.

After the so-called progress that was made at the June EU Summit, there have been no material developments. The peripheral bond markets are always a good indicator of market tensions with regard to the debt crisis and Spanish 10-year bonds have hit fresh euro-era highs above 7.6% in recent weeks, with equivalent Italian debt setting its own record above the 6.5% level. Whilst economic growth throughout the eurozone is contracting sharply, Spain is edging towards a full-blown bailout and Greece could yet fail to secure its next bailout tranche, which is essential if the country is to avoid collapse.

Economic conditions in the US continue to provide plenty of cause for concern. The US economy slowed from a pace of 2.8% in Q4 2011 to a pace of 1.5% in Q2 2012. Poor performance in the world’s largest economy stunted the US dollar’s progress in recent weeks by increasing speculation that the US Federal Reserve is edging towards introducing the much-debated QE3 measure. However, the Fed’s recent meeting produced yet more ‘wait-and-see’ rhetoric, which has taken some weight off the dollar for the time being.

News out of the UK has also been far from comforting. Recent data has indicated that the domestic economy contracted by 0.7%, which is a shockingly poor figure well below expectations. The Bank of England has introduced another round (£50bn worth) of quantitative easing and the government has initiated an interesting new Funding for Lending Scheme to encourage banks to step up lending, but the effects of these are some way from being felt. In the meantime, UK growth is expected to remain very weak indeed. Sterling still holds some safe-haven demand, though this may be insufficient for it to avoid losses against the euro and dollar this month.

GBP/EUR

Having hit near four-year highs up towards €1.29, this pair has since erased its gains and at the current level of €1.26, it is back where it started in July. Whilst we do maintain that the pound will remain on its longer term uptrend, we anticipate some further short-term sterling softness in the coming weeks.

Spain spooked the markets in July, with borrowing costs soaring well above the 7.0% level amid a request from the Spanish regional government of Valencia’s request for financial aid and concerns of similar emergency needs across Spain’s regions. Spain’s banks have already agreed a bailout with international creditors and it has certainly discussed a full-blown sovereign bailout with Germany, which continues to demonstrate growing bailout-fatigue. In terms of austerity and economic reforms, PM Rajoy is doing all he can but investors are still hammering Spain in the bond markets. A sovereign bailout is looking increasingly unavoidable.

Last week’s ECB meeting was the most eagerly-awaited in a very long time but the market was left wondering what could have been. Draghi had a plethora of options available to him and after he stated that he would do “whatever it takes” to preserve the euro, he delayed any action whatsoever. The decision not to cut interest rates was unanimous after June’s 0.25% reduction, despite ECB President Draghi predicting that the eurozone economy is likely to recover only very gradually, whilst noting significant risks to further deterioration. Q2 was an awful one for the eurozone, with weakness in the periphery spreading to core states including Germany. The latest German and French manufacturing figures reveal a sharp contraction and eurozone unemployment remains a major issue, having recently reached a fresh record high of 11.2%.

Draghi disappointed the markets by suggesting that the European Stability Mechanism will not be granted a banking license, which had been previously indicated by an ECB policymaker and would have greatly increased the bailout funds’ firepower. Importantly, Draghi indicated that the ECB may move to buy up peripheral debt to ease pressure in the bond markets, but his comments fell short of a pre-commitment, never mind concrete action. German resistance to ECB bond-buying and demands for fiscal restraints represent a key obstacle to ECB emergency action.

Whilst alarm bells ring in the eurozone, the UK economy is also in a very weak state, which is best demonstrated by the recent-0.7% GDP figure from Q2, leaving the UK economy firmly in recession. Initial signs have not been positive for Q3 either; the UK manufacturing sector posted its worst figure in three years and the UK services sector gave its worst showing in eighteen months in July.

The Bank of England is clearly concerned with economic conditions in the UK, having introduced another round of quantitative easing in July to support the economy. The MPC voted 7-2 in favour of the £50bn top-up and there were suspicions that another dose would be approved at its recent August meeting in response to the latest shock GDP figure, though sterling has been spared this development. The government has also taken its own action to try to drag the UK out of recession in the form of its Funding for Lending initiative, designed to incentivise UK banks to increase lending, something that the Project Merlin initiative failed to do.

It needn’t be all pessimism towards the UK economy; there remains some fairly strong scepticism over the reliability of the awful initial Q2 UK GDP figure and in combination with the improved weather conditions, hopes for a significantly stronger second half of the year are not misplaced. The effects of the additional round of QE, the Funding for Lending programme should help the UK return to growth, though this may have to wait until Q4. Unfortunately though, initial expectations that the London Olympics will add 0.5% to UK GDP this year are receding.

The sharper than expected recession has highlighted the question marks over the UK’s treasured AAA credit rating. Rating agency Moody’s has retained its negative outlook for the UK’s credit rating, though fears have been quelled somewhat by Standard & Poor’s recent reaffirmation of the UK’s top rating with a stable outlook.

Sterling is trading at €1.26 at present, which represents a pretty aggressive decline from its multi-year high of €1.2878. With weak UK growth figures set to flow this month, we expect this rate to retrace further in the coming weeks down to €1.25. There is a risk that this pair will revisit its June lows of €1.2270 but on balance we think this is unlikely.

GBP/USD

Sterling has remained range-bound against the US dollar over the past month, fluctuating between $1.54 and $1.57. The news out of the US economy has broadly been very disappointing; June’s labour figures were alarmingly poor, manufacturing data was shaky and retail sales contracted sharply. In addition, the US economic growth rate of 1.9% (annualised) in Q1 slowed down to 1.5% in Q2 - almost half of the rate we were seeing at the end of last year.

Naturally, weak growth figures saw bets on QE3 ramped up yet again, which has been a thorn in the US dollar’s side for some time now. Ben Bernanke disappointed the market yet again in his July US Federal Reserve Press Conference. There was no QE3 announcement, nor any real signals that a move is imminent. Clearly this is good news for the US dollar, if not for global market confidence.

The recent release of July’s US non-farm payrolls figure should free up the US dollar to make some gains this month. Data revealed that 163 thousand jobs were added to the payrolls in July, which represents the best showing in five months and should ease fears of a sharp slowdown in the US for now. One thing is certain though, QE3 will remain very much on the Fed’s list of options for the foreseeable future. We see the Fed pulling the trigger on QE3 at some point in Q4.

Despite Moody’s recent reaffirmation of the UK’s AAA credit rating, market confidence in the pound appears to be waning thanks to a steady flow of weak UK growth figures. More of the same can be expected this month and to make matters worse, anecdotal evidence suggests the Olympics will fail to provide the economic boost that was initially expected. The Bank of England held off from adding another dose of QE at its July meeting but suspicions of another top-up will grow with every negative piece of UK data.

We hold a negative view of the EUR/USD pair in the coming weeks, based on continued uncertainty on all fronts; sharp contraction in eurozone growth, a possible Spanish bailout, Greek uncertainty and a continued imbalance between talk and genuine action. If EUR/USD heads down towards $1.21 as we expect, then this would almost ensure GBP/USD declines even if UK news is positive. Given that we expect news out of the UK to be negative, we feel this pair’s downturn could be quite aggressive. A move down $1.52 looks realistic in the coming weeks.

Richard Driver

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

Caxton FX Weekly Round-Up: More Euro Weakness Ahead

The euro-bashing continues amid delays to the German court ruling

The euro has hit fresh lows against the dollar and the pound in the past week thanks to further declines in US stocks, widening peripheral bond yields and heightened eurozone concerns.

Germany’s constitutional court has decided to wait until September to give its ruling on whether the changes to the European Stability Mechanism and the fiscal compact are legal according to German law. This sets back the implementation of the progress made at the EU’s last Summit and ensures a high degree of market uncertainty over the rest of the summer. The decision goes against the pleas from the German government for a swift ruling that would help contain the debt crisis.

ECB President Draghi has tried to calm market tensions, asserting last week that the euro as currency was irreversible, but investors failed to take much comfort. The euro has been unjustifiably high over the past two years given its waning economic fundamentals and soaring debt levels; the euro’s sell-off since early May is the correction that we have had to be very patient in waiting for.

Bank of England ‘Funding for Lending’ scheme impresses

Sterling is benefitting from plenty of safe-haven flows at present, which has seen GBP/EUR hit a fresh 3 ½ month high of €1.2768. There have even been some small pockets of optimism in the UK economy of late; industrial and manufacturing production growth improved in May thanks to shifting the Bank Holiday to June. The UK trade deficit even narrowed significantly in May. Last Friday saw the release of details relating to the Bank of England’s new ‘Funding for Lending’ scheme. UK banks will have access to £80bn worth of cheap loans and will be incentivized to pass this on to UK businesses. The markets responded positively to the programme, which starts in August, and sterling performed strongly. Nevertheless, the market will not kid itself into thinking the UK economy is going to gain much momentum in H2 of 2012.

UK inflation has come right down to a 34-month low of 2.4%, driven by weak domestic activity but this also been helped by the stronger pound. Low inflation clearly supports the MPC’s decision earlier this month to introduce further QE. The minutes from that meeting will be released on Wednesday morning and a unanimous vote in favour of QE could possibly be revealed, at least a strong majority. This shouldn’t weigh on sterling too heavily. UK retail sales data for June should again be positive on Thursday, helped by the Queen’s Diamond Jubilee celebrations.

US Federal Reserve Chairman Bernanke speaks again over the next two days and with data revealing on Monday that US retail sales contracted sharply once again in June, hopes are high for indications that QE3 is imminent. Despite ongoing weakness in US figures, we expect yet more of the same from Bernanke, a dovish tone but reluctance to signal QE3 for the time being.

Sterling is trading at €1.2720 today and continues to look poised for another push higher. The euro’s sell-off looks set to drag on further, particularly in light of the German constitutional court’s decision to delay its decision. At $1.56, sterling is performing strongly against the USD but we don’t see this lasting much longer. EUR/USD should weigh on the GBP/USD but we still see the pound holding up better than the euro.

End of week forecast
GBP / EUR 1.2775
GBP / USD 1.5550
EUR / USD 1.2175
GBP / AUD 1.5275

Richard Driver
Analyst – Caxton FX

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

Greek election out the way but euro remains vulnerable

Greece votes in favour of the euro but market relief short-lived

The long-awaited Greek elections last Sunday produced the result the market wanted, but only to an extent. New Democracy - the main pro-bailout, pro-euro party – won the election, but by only the smallest of margins, so the uncertainty of coalition-forming remained. What also remains are the inevitable attempts to renegotiate Greece’s bailout terms by any coalition that does form. With Merkel sounding as tough as ever on Greece this week, negotiations are likely to be tense and drawn out.

The market has been to the brink several times before in the case of Greece and the euphoria in response to the Greek election result was understandably short-lived. Certainly the worst-case scenario – a victory for the leftist Syriza and a potential euro-exit- was avoided but investors know full well that Greece’s second bailout will not buy sufficient time for Greece to get its house in order in a permanent sense, so the country’s painful saga continues.

Spain is very much in the headlines at present, as the country’s 10-year bond yields have broken through the dreaded 7.0% level which has forced other eurozone nations into bailout requests. Spain has already reached an agreement for a €100bn bailout of its banking sector, but these borrowing costs could ensure the sovereign itself will be requesting a bailout before long. The delay to the second part of the audit of Spain’s banks until September has not helped sentiment one bit, with suggestions being made that Spain’s bank could need more than €100bn.

Germany is likely to be the next country to dominate the headlines, though unsurprisingly not due to economic weakness or high debt levels. June 29th will see the German parliament vote on the EU fiscal treaty and the creation of the permanent eurozone rescue fund. Any indications that Angela Merkel is losing her grip on power domestically are likely to weigh on the euro significantly. Nonetheless, Merkel is widely expected to prevail in the vote.

Sterling firm ahead of MPC minutes release

Tomorrow’s MPC minutes will reveal the voting pattern with respect to the introduction of further UK quantitative easing at the MPC’s June meeting. Today’s weak inflation data has already made the domestic environment a more QE-friendly one, though we look back to last week’s Mansion House for indicators that the majority of the MPC will have different ideas. King announced an £80bn ‘funding for lending’ speech, which suggests the BoE are looking at alternative ways of boosting UK growth.

This week also brings US Federal Reserve monetary policy into sharp focus, with the central bank meeting and giving its statement and economic projections on Wednesday. Increasingly weak US growth data has pressurised the dollar of late but we continue to bet that the Fed will hold fire for now.

Having dipped as low as €1.2270 last week, GBP/EUR is now trading at €1.24, which is a reflection of the market’s muted response to the Greek election. We remain confident that we will see May’s highs just below €1.26 before long, though developments in Greece and Spain could have the final say about just how soon this will be.

Sterling is trading at $1.57, thanks to fears that the Fed is edging towards QE3. The current retracement in the EUR/USD pair is not something we see being sustained much past $1.28, which leaves upside potential from the current $1.2660 level as pretty limited.

End of week forecast
GBP / EUR 1.25
GBP / USD 1.5650
EUR / USD 1.25
GBP / AUD 1.53

Richard Driver

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

German GDP slows, alarm bells ringing?

Second quarter German GDP was released this morning and it showed an alarming slowdown in growth in the European powerhouse. The German economy grew by just 0.1% from April to July, below expectations of a 0.5% figure, and well below a first quarterly growth figure of 1.3%. In addition, the eurozone’s second quarter GDP figure as a whole came in at 0.2% (from a Q1 figure of 0.8%). What is more, forward-looking data suggests there Germany can expect ongoing slower growth in the second half of the year.

The euro has rebounded from losses (against the dollar at least, though not against the pound) incurred as a result of these figures, so the market does not appear to be too concerned. But shouldn’t it?

Germany’s sharp slowdown will only adds further evidence that the global economy is stalling. We are seeing it in America, the UK, France; even Chinese growth slowed down last quarter. However, it may actually be because economies such as the UK and US teetering on the brink of a double dip recession that the euro has no suffered from today’s data. There is a real shortage of appealing currencies at present. Even the outperforming swiss franc is coming under pressure as a result of the Swiss National Bank’s plans to curb its strength.

It is no secret that a healthy German economy is essential if it is to drag the eurozone’s debt-laden nations out of their current crises. The German economy is export led and needs global demand to pick up, which seems unlikely at present. Germany’s willingness to continually bailout the ailing eurozone periphery, and perhaps even core nations such as Italy and France, will be tested to the absolute limit if Germany plunges back into recession. The market is typically less sensitive to eurozone data than to that of the UK and US, but with German growth now under the microscope this may now cease to be the case. Germany is currently the eurozone’s safety net, without this economy propelling it forward; bets on a euro collapse will undoubtedly increase.

Richard Driver
Senior Analyst – Caxton FX


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

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

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

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

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

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

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

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

Richard Driver
Analyst – Caxton FX


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

Crunch Time: EU Summit

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

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

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

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

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

Richard Driver
Analyst – Caxton FX


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

The euro advances against the dollar

The euro continued to make significant gains against the US dollar today. Further rumours about Middle East and Russian buyers of European debt helped send the single currency higher, while weak housing data from the states dragged the greenback lower.

EUR/USD briefly went above $1.35 to hit an eight week high of $1.3537. A report in a German newspaper outlined a prospective new restructuring plan for Greece. The report said that the German government was drawing up a plan to allow the Greeks to buy back their own debt using a eurozone bailout fund. The report has been denied by the German parliament.

The seventeen-nation currency has had a few positive blips recently, through the ZEW figures yesterday, speculation of sovereign wealth funds purchasing EU debt and JC Trichet alluding to an increase in the EU’s interest rate. However, the macro issues affecting the region are still prevalent and should set the overall tone for the year. Any boost the euro has received since the start of the year is surely just band-aids re-attaching a dismembered limb.

Is everything going to be okay in Europe or is this simply another calm before another storm? Please add any thoughts and comments below.

Tom Hampton

Analyst – Caxton FX

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

UK inflation figures send sterling higher

Sterling extended its gains against the dollar after a much higher than expected inflation reading fuelled expectations of an interest rate hike from the Bank of England.

The December Inflation Report came in at 3.7%, far higher than the expected 3.4%. Rising commodity (specifically food and fuel) prices are thought to be the main drivers behind the surge. These results show the largest rise between November and December in history. Further upward pressure is expected next month as the January figure will show the preliminary effects of the 2.5% rise in VAT. If the Core Price Index (CPI) continues to rise at a similar rate, the BoE will be forced to raise interest rates, perhaps as early as May.

Focus will now shift to next week’s BoE Monetary Policy Committee meeting minutes to see if other policy members have joined the hawkish sentiments of Andrew Sentence in calling for a rate rise.

The euro has also pushed over 1% higher against the greenback after economic confidence figures came in considerably higher than expected. Also, reports of investors from the Middle East and Russia buying eurozone debt have helped to send the single currency higher. However, speculation that the EU’s policy makers plans to stop the crisis from deepening are working are premature, if not pre-glint-in-the-milkman’s-eye. The true depths of the debt crisis have not been realised and national plans to cut deficits are lightweight at best. There could still be a long way to go in this saga. Don’t forget that it was not until May 2010 that the Greek tragedy unfolded. Expect to see a couple of unanticipated events this year.

When should Merv and the boys increase interest rates and by how much? Any thoughts or questions, please feel free to post below.

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

An unexpected bounce in the euro’s step

A successful Spanish bond auction helped ease some concerns about the debt crisis plaguing the eurozone’s most indebted nations and finally gave the market some interest and direction.

The euro hit a one month high against the Swiss franc and regained some ground against most of its counterparts following the news. News last night that Germany’s principal, Angela Merkel, may be willing to extend the EU’s relief fund helped to put investors mind at ease and the bond auction went through without a problem. Both the Portuguese and Spanish auctions were concerns at the start of the week, helping to suppress the single currency. However, with the US dollar’s weakness late in the session yesterday and the news of the Iberian sales going well, the 17 nation currency has appreciated to €1.19 and €1.33 against the pound and greenback respectively.

The outlook for EUR remains to the downside in the medium term however. With no plan set in stone and Southern Europe’s debt snowballing, one set of bullish data from the US could turn everything back on it head.

In other news, Timothy Geithner once again called for the People’s Bank of China to allow the yuan to appreciate. Its artificially low value gives China an advantage over the rest of the export market and makes American goods less competitive. However, it seems highly unlikely that the world’s second largest economy would give up such a strong opportunity to hunt down the ailing world ‘no 1.’

Should China do what is best for them or the world economy? To comment on this or any part of the blog please write a comment below.

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

Ireland’s potential bailout boosts the euro

Sterling fell against the euro today – ending a run of six straight sessions on the rise - following speculation that Ireland may soon have a bailout package agreed. The supposed bailout helped to dampen fears about debt problems facing the periphery eurozone nations.

Despite poor preliminary GDP figures from France, Germany, Italy and dreadful industrial production results, the euro still managed to regain some of its losses from the past few days to currently be trading around €1.1730 against the pound.

The one saving grace for the euro is whispers in the market about an €80billion bailout package for the emerald isle. However, Ireland’s finance ministry said chatter about a bailout was untrue, but traders said reassurances from the EU and G20 that bondholders would not have to take a write down on Irish debt helped the euro to recover. It was later reiterated by the European Commission that Ireland had not requested financial aid.

It is hard to believe that GBP/EUR would have such a big movement against the grain, simply because Irish bondholders will not be taking a hit due the economy’s fragility alone. This reassurance may set some minds at ease, but stagflation in Spain and less than convincing GDP figures would surely override this? Next week we could see a full bailout plan for the Irish government, conveniently to the same tune as Allied Irish and Anglo Irish Banks combined.

Next week, with another busy week of data to be published from the UK, we could see similar gains for the UK currency.

I hope we see England drive the Aussies over the try line of parity just like the greenback has done today. Come on England!

Tom Hampton
Analyst – Caxton FX

Sterling re-coups early losses

The UK currency was near a one month low against the dollar after yesterday’s stock market move downwards.


Positive data from Germany showing the Ifo index hit a three year high has given the euro and pound a much needed boost against the dollar. However, as we saw in yesterday’s trading, these gains are expected to be short lived as lingering worries about the US slowdown and EU debt worries will ultimately allow safe haven currencies to shine through.

Paradoxically, the Japanese yen has fallen against most of its major peers, including falling from a fifteen year high against the US dollar, on speculation the Bank of Japan will intervene to keep exports more attractive.

Germany says it may have to bail out Ireland

Germany has admitted that Ireland, or any other eurozone state weighed down by the financial crisis, could not be allowed to collapse and would have to be bailed out by other eurozone members.

German finance minister Peer Steinbruck said it would be intolerable to let fellow EMU members fall victim to the global financial crisis. "We have a number of countries in the eurozone that are clearly getting into trouble on their payments," he said. "Ireland is in a very difficult situation. The euro-region treaties don't foresee any help for insolvent states, but in reality the others would have to rescue those running into difficulty."

Fears are mounting that Ireland may not be able to cover the massive liabilities of its banking system.