You can’t keep the pound that easily

In his first speech regarding Scottish independence, BoE Governor Carney outlined the potential issues that could arise if the Scottish kept the pound as part of a currency union. The Governor referred to the eurozone as an example of the significant steps that would need to be taken to support a monetary union. Carney said the Scottish government would have to give up some of its sovereignty over fiscal policy, and there would also need to be fiscal risk-sharing and solid banking arrangements.

The UK treasury has said it is highly unlikely that a currency union will be agreed and the Scottish government needs a plan B. The SNP have so far failed to come up with a “plan B” and despite this being a point of weakness, it is unlikely to hinder the campaign.

Sasha Nugent

Currency Analsyt

Caxton FX

Caxton FX Weekly Report: Fed in Focus

Another week of vulnerability for sterling

Sterling looked less robust last week as a firmer euro managed to direct the rate below 1.19, and finally investors began to respond towards solid US data. This week, inflation and unemployment figures will be released and after comments from BoE member Weale regarding softer inflation, this figure will be watched carefully. Price pressures have eased significantly, and this has dampened expectations that the central bank will need to raise rates soon. Despite the pick-up in economic activity, lower inflation will allow the central bank to fulfil their commitment to maintain low interest rates in order to help absorb slack in the economy. Unemployment has been improving faster than the BoE has predicted and claimant count figures on Wednesday should also support the brighter labour market in the UK. The Bank of England will release the monetary policy minutes from their last meeting, and this should shed some more light on whether the MPC’s view about the UK has changed since the inflation report. Although it is unlikely that the MPC’s stance has changed dramatically, any significant comments here will most probably cause some volatility. Other figures such as retail sales and current account data may also offer sterling some support this week, however it will not be easy to rebound considering the heavy calendar for the eurozone and the Federal Reserve monetary policy meeting this week.

The euro bulls return

Today’s Eurozone PMI figures kick started a week packed with eurozone data. With the bullish euro investors managing to dictate trading in both EUR/USD and GBP/EUR, it doesn’t seem like things will be any different for sterling this week. The euro is still preventing the pound from driving the rate back up to 1.19 and we doubt the market will hesitate on putting more money into the euro if data provides upside surprise. It will most probably be more difficult for the euro to gain against the dollar despite some solid numbers. With the Federal Reserve’s monetary policy announcement on Wednesday, we may begin to see the single currency suffer at the hand of some investor repositioning just in case the Fed decide to surprise us with the beginning of tapering. There is more opportunity for the euro to gain against sterling this week, however if the Fed hold of tapering this month, this could provide the euro with another opportunity to drive the EUR/USD rate through 1.38.

All eyes on the Fed meeting

We are beginning to see signs that the market has begun to pay more attention to the more positive US figures we have seen of late. With the Federal Reserve monetary policy announcement only days away, US data will play an even more significant role in encouraging investors to reposition their portfolios towards the dollar. Although the case for a December taper has been building, many economists believe the Fed will begin to reduce stimulus in January. Therefore, if the Fed refrains from tapering this month, we doubt the market will respond by selling the dollar as aggressively as they did in September. It is likely that the greenback will experience some temporary weakness, however investors will eventually begin to prepare for a January taper. This is a fundamental week for the dollar and direction of both EUR/USD and GBP/USD hangs in the balance of the Federal Reserve announcement on Wednesday.

End of week forecast

GBP / EUR	1.1855
GBP / USD	1.6250
EUR / USD	1.3720
GBP / AUD	1.8350

Sasha Nugent

Currency Analyst

Caxton FX

Middle East crisis overshadows MPC minutes

With tensions in the Middle East reaching fever pitch, we’ve finally seen the market react today. Investors have lined up to put their money in safer assets on the back of the geopolitical risks with the US dollar, Swiss franc and Japanese yen all benefitting from the global uncertainty.

Libya, the latest in a string of countries across northern Africa and the Middle East to revolt against its oppressive regime in recent times, is teetering on the edge of civil war as Muammar Gaddafi, the tyrannical ruler, desperately clings to power saying that he will fight “until the last bullet” - a phrase which I’m sure won’t sit well with the protesters looking to give their country the progress it needs after decades of mismanagement.

The pound fell against its safe-haven US counterpart today as investors sought to hedge the risk of a potential fall-out from Libya. The pound gained against the euro in early trading on the back of this US strength, however ceded its gains on the back of hawkish comments from ECB policy maker Yves Mersch. Mersch said that he would not be surprised if the bank “sharpened its tongue on inflation”.

The comments saw a huge swing in the euro’s favour perhaps alerting the market that there are indeed big decisions to be made on interest rates after the news of the unrest in the Middle East quite rightly stole the headlines.

The ECB is still expected to trail the Bank of England in raising interest rates, but Mersch’s comments have certainly done the euro no harm. The gains come despite concerns raised by the Bundesbank Governor and one time ECB president candidate Axel Weber, who fired a parting shot at the ECB’s bond purchasing programme on the same day that it was revealed that they bought 24% of Portuguese debt in the auction 2 weeks ago.

Despite waning enthusiasm for the pound off the back of falling risk sentiment, the market will now be gearing itself up for the results of the MPC’s minutes which will be revealed tomorrow. 

Edward Knox

Analyst - Caxton FX

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Is this a blip, or the beginnings of a double-dip?

It seems from yesterday's MPC minutes – the meeting to which was crucially held prior to the release of our shock GDP figure - that the balance of power between the hawks and the doves has shifted. The idea of raising interest rates to combat rising inflation - estimates of which reach to 5% by end of the year thanks to the triple whammy of high energy prices, import costs and the VAT rise - is increasingly on the agenda.

The anticipation of raising interest rates was enough to boost sterling at the beginning of the month. However, with negative economic growth, stagflation is fast becoming the new buzzword and any further rally for sterling has been well and truly checked. 

Imagine if you will, if on the 13^th January, the 9 member committee had voted for a quarter point increase in the base rate. Borrowing costs on the rise, just as the word double-dip is reintroduced to every editor trying to flog their paper. Panic? Probably, yes.

To this end King was probably correct in keeping monetary policy loose, at least for now. After all, how is a UK based rate rise going to curb rising fuel and food costs exactly? 

King is walking a very fine line at the moment; keeping interest rates low for too long could inevitably lead to longer term problems for the economy; raising them too early and what little confidence there is in an already weak economy would be eroded.

To be fair, the paper floggers may be jumping on the bandwagon to a certain extent; are we facing a double dip? Not yet, at least not technically – we would need to see 2 quarters of consecutive contraction first. The GDP figure that is causing all this mischief for the pound (as I detailed in my previous blog post) could still be revised up. The weather, the volatile nature of data when emerging from recession, and the fact that the 0.5% figure only accounted for 40% of surveys issued heightens the possibility that the figure will be revised. The second estimate (not due until Feb 25^th) could offer a more uplifting figure for the policy members to get their teeth stuck into. The pound meanwhile hangs in the balance.

Edward Knox

Analyst

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