Spanish bailout will come but not for another month

The newswires have today been full of speculation over the imminence of a Spanish bailout. The FT has reported this week that negotiations between Spain and the EU are going places. The two parties are working on an economic reform programme which is rumoured to be unveiled next week. Note though, this is only a prelude to a bailout request.  

What is Spanish PM Rajoy waiting for? Well, regional elections in the Basque country and Galicia are being held on October 21 and Rajoy is likely to wait until after that, as a bailout request before this date would more likely than not damage his Conservative party’s chances. This end of October period coincides with some major Spanish debt repayments and is probably as long as the market is willing to wait for some concrete progress.

There is something to be said for getting in early with a bailout request whilst bond yields are away from their record highs, so that Rajoy is in a better position to negotiate favourable bailout conditions. If Rajoy waits until the situation returns to panic mode, Spain’s creditors could have him over barrel.

Next Friday’s release of the Spanish banking sector’s stress tests could well spook the markets and send bond yields soaring up to 7.0% again but on balance we expect Rajoy to wait until late October, just in time for the ECB’s meeting in the first week of November. This leaves time for bailout conditionality to be ironed out between the interested parties.

We believe Rajoy will use the next month to try everything he can to achieve the best result for his country. He is under huge domestic political pressure by an increasingly angry and volatile population and cannot afford to be seen to sacrifice more than is absolutely necessary in return for a bailout. Everything should be in place by the end of October and until then, the euro is likely to come under increasing selling pressure.

Richard Driver

Currency Analyst

Caxton FX

September Monthly Outlook: GBP/EUR, GBP/USD

August was another strong month for the single currency as the financial markets continued to take comfort in ECB President Draghi’s pledges to do “whatever it takes” to save the euro. There were no major swings among the major pairings, with August typically being a sleepy month where traders and policymakers alike take their summer vacations. Despite a recent upturn in US economic figures, the dollar remains on the back foot, with QE3 speculation more prevalent than ever.

Recent domestic data suggests conditions have improved somewhat in the past month, which gives hope to the market and consumers that the UK economy can yet stage some sort of recovery in the second half of the year. The Bank of England will be content to see how this bounce in activity progresses, so fears of imminent quantitative easing should subside for the time being. Moreover, with a busy calendar for the US and the eurozone in the coming weeks, the UK economy is very much out of the spotlight at present.

The month ahead could well be a pivotal one in the timeline of the eurozone debt crisis. We are seeing the European Central Bank preparing to launch a programme of unlimited bond-purchases as part of a wider bailout package for Spain. The pressure will now build on Spanish PM Rajoy to make the necessary request for help but the conditions Germany pushes for is likely to be subject to tense negotiations.

Next week (September 12) brings the long-awaited decision from the German Constitutional Court on the legality of the European Stability Mechanism and the fiscal compact agreed earlier in the year, around which there is considerably uncertainty. There is also plenty of political risk in the form of a general election in the Netherlands, while the Troika will spend much of September assessing Greece’s attempts to reform before deciding on whether to release the essential next aid tranche. In addition to all these eurozone events, we will learn whether the Fed will finally pull the trigger on QE3 this month.

GBP/EUR

Sterling remains at strong levels against the euro; it is quite clear that the market has spent recent weeks waiting to see how September’s events panned out before punishing the euro any further. Indeed, whilst decisions and concrete actions have yet again been conspicuous by their absence, comments from ECB policymakers and eurozone political leaders have been falling on sympathetic, or rather, hopeful ears. This has fuelled a rebound for the euro.

Signs of life in the UK economy

The UK economy has enjoyed some good news in the past week in the form of some better than expected manufacturing and services sector growth figures, with the latter in particular raising hopes for a recovery. UK unemployment continues to make progress, with the jobless rate falling to an 11-month low of 8.0%. However, the market will need more convincing that the worst of this double-dip recession is behind us before sterling really begins to reap the benefits of improved data. The initial Q2 GDP figure of -0.7% was revised up to -0.5% but confidence is understandably still very fragile. The Bank of England looks content to remain in ‘wait and see’ mode with respect to the need for further QE, so the risks to sterling in this regard are limited for at least the next month.

Will Super Mario save the day?

Positivity surrounding an imminent bond-purchasing plan to deal with soaring Spanish and Italian borrowing costs has been the key feature of the debt crisis in the past few weeks. Timescales as to the launch are immensely tricky to pin down due to the need for Spain to request help from the ECB but the central bank’s fire-fighting measures are likely to be seen a positive for the euro when it does finally come about.

However, these unconventional measures do little to address the fundamental issue at the heart of Spain and Italy’s predicament – their lack of competitiveness. The eurozone periphery cannot bounce back with the euro as overvalued as it continues to be (regardless of the depreciation we have seen this year). Indeed the ECB’s commitment to fire-fighting this summer has exacerbated the situation by strengthening the euro. Crisis management policies like bond-purchases will not see the eurozone through this crisis. We have seen this year that ECB interest rate cuts weaken the euro and for us, it is only a matter of time before the ECB takes this option again, finally putting concerns over inflation to one side. The incentive to cut rates is all too clear; the ECB itself has this week significantly downgraded the eurozone’s growth prospects for both this year and next (possibly as low as -0.6% and -0.4% in 2012 and 2013 respectively).

The ECB and Germany’s opposition to granting the ESM a banking license also continues to stand in the way of any so-called ‘silver-bullet’ solution. Such a move would effectively give the permanent bailout fund unlimited access to ECB funding, eliminating the concerns that linger over inadequate firepower.

Huge risk events ahead in September

The next major obstacle in store is the German Constitution Court’s ruling on whether the new role for the ESM (the permanent bailout fund) and the eurozone’s fiscal compact complies with German law. If it does not, then this would be disastrous for the euro and while the probability is of a positive outcome, the risks to the contrary are significant. September 12 is made all the more important by the Netherlands’’ general election, which has been centred on the issue of the debt crisis. If anti-austerity parties do as well as polls are suggesting, then this is likely to weigh on the single currency.

Concerns over Greece are likely to come to the fore again this month, as the Greek coalition struggles to work through another €11.5bn of spending cuts and as the Troika returns to complete its review of Greece’s efforts to address its fiscal position. A positive Troika report is necessary in October if Greece is to receive its essential next emergency loan, without which it will default and most likely exit the eurozone.

Sterling may well have another slow month against the euro in September as the market prices in a (temporary) resolution to Spain’s crisis. However, we do see this pair resuming its uptrend beyond the short-term, slowly creeping higher towards, though probably falling short of €1.30 by the end of the year. €1.25 should provide plenty of support and we don’t see sterling weakening below this level but equally, provided the German constitutional court give a positive ruling on the ESM and fiscal compact, sterling could well spend much of the coming weeks below €1.2650. 

GBP/USD

Sterling is flying at a 3 ½ month high at present, despite the UK economy’s significant underperformance of its US counterpart. The QE3 issue continues to haunt the US dollar and delay what we continue to believe will be a robust end to the year for the greenback. There is no doubt that the US Federal Reserve has engaged in greater discussion of further monetary accommodation, with several policymakers convinced of the need of QE3. However, Ben Bernanke chose not to utilise his annual Jackson Hole speech to signal another round of QE, though crucially he said nothing to discount it.

Can the US dollar avoid QE3?

It does appear to be a case of ‘when’ not ‘if’ with regard to QE3. The Fed’s reasoning on QE3 seems to have changed from a stance of committing to more QE in the event that the US recovery deteriorates further, to a commitment to QE unless conditions markedly improve. Economic figures out of the US have been somewhat improved in the past few weeks, which may well convince Ben Bernanke to keep his powder dry on September 13. However, there is every chance that Q4 will bring the decision the market is hoping for.

The sounds out of the Bank of England in recent weeks have given the market some reason to look kindly upon the pound. A cut to the BoE’s already record-low interest rate has effectively been discounted and Mervyn King appears content to wait to see the impact of its Funding for Lending Scheme before introducing further quantitative easing. Whether or not more QE comes in November really depends on growth figures in the interim but the latest indicators do suggest a mild upturn.

Nonetheless, we continue to envisage a significant move lower for the EUR/USD pair in the coming months. If this comes about, it will weigh on the GBP/USD pair to a great extent. The euro’s rally against the USD is looking increasingly stretched at current levels of $1.2650 and given that we see this pair below $1.20 by the end of the year, we do expect GBP/USD to retreat significantly from the $1.59 level where it is trading at present. A rate of $1.57 is realistic in the coming few weeks. 

Richard Driver 

Currency Analyst 

Caxton FX

Roadmap to the Spanish debt crisis

This week is of huge significance to Spain and it might be interesting to give a brief roadmap of how Spain got into its current predicament. Up until 2008, the Spanish economy had been doing well. For instance, real estate prices rose 200% from 1996 to 2007 and the Spanish banking system (with small local banks known as ‘cajas’) had been viewed as one of the best equipped to deal with a financial crisis. Prior to 2008, some regions of Spain were very close to having full employment.

So what went wrong? In the third quarter of 2008, Spain’s economy officially entered recession, after 15 consecutive years of growth. Not a big surprise really, seeing as most countries around the world also went into recession during this period. Rating agency Standard and Poor’s then downgraded Spain’s prized AAA to AA+ in 2009. So, they adopt an economic stimulus plan worth about 5% of their GDP, which leads to the exiting recession in the first quarter of 2010. Things look optimistic.

Then investors start to take a closer look at the Spanish economy and realize that the public deficit is huge: 11.2% of their GDP. After admitting Spain was in trouble, Prime Minister Zapatero introduced austerity measures to address the problem. He raised the retirement age from 65 to 67, reformed pensions and passed a constitutional amendment forcing governments to maintain a balanced budget. Zapatero was then voted out in late 2011, and Mario Rajoy’s conservative party filled the void with an absolute majority.

However, the Spanish economy was already on a downward slide, having produced no growth in Q3 and suffering a 0.3% contraction in Q4 2011. By March, unemployment had doubled the Eurozone average by climbing to 24.4% (it now soars above 25%). In April, thousands protested across the country against the government cuts, adding political instability into the mix.

In the summer of last year the Spanish banking sector began to crumble. Bankia requested a €19 billion state rescue in May, which pushed Spain itself into requesting €100 billion bailout for the struggling banks. In July, one of Spain’s richest regions, Catalonia, requested aid from the central government and several more followed suit as the gravity of the crisis surfaced. With borrowing costs setting fresh record-highs, it has come to a tipping point which appears to have prompted action from the ECB.  

It goes without saying that the European Central Bank’s meeting in Frankfurt tomorrow could be crucial in the context of the Spanish and wider eurozone debt crisis. ECB President Mario Draghi has assured the market that the bank would buy enough bonds on the open market to put a stop to the “financial fragmentation” that currently exists throughout Europe. Draghi has hinted only this week that the ECB is free to buy government bond maturing in three years or less, without breaking the EU treaties and overstepping its mandate by stepping in to money-printing terrritory. This has already had a dampening effect on Spain’s soaring borrowing costs.

Whether the ECB unveils its plan to intervene in the bond markets on Thursday or not, it will do so fairly soon, that much has become pretty clear. But if a country wants to get their hands on this attractive offer from the ECB, they will first have to agree to a set of conditions. Just how strict these conditions are will determine how quickly Spanish PM Mariano Rajoy agrees to request help from the ECB.  He asserted last week, "When I know exactly what is on offer I will take a decision.” Rajoy will not be able to get the ECB’s help for free but certainly Merkel needs to be careful in not overstepping the mark when making austerity demands of Spain’s already crippled economy. There is bound to be plenty of brinkmanship involved if Spain is to request help.

Whilst the ECB meets tomorrow, Rajoy and Merkel will be also be meeting, where it is anticipated that the two leaders will be negotiating an estimated €300bn Spanish sovereign bailout. September was always ear-marked as an all-action month and it looks as if we could indeed be on the brink of some major developments. Whether or not the market will be convinced remains to be seen.

Harry Drake
Caxton FX

 

Caxton FX Weekly Round-up: Dollar poised for rally

Pressure on for revised UK Q2 GDP figure

Last week’s all-important Quarterly Inflation Report from the Bank of England provided sterling with support just when a return to the €1.25 level was looking probable. King seemed to discard the option of another interest rate cut, describing it as potentially “counterproductive” and the likely effects to be “neither here nor there.” There were no real signals that the BoE is poised to introduce further quantitative easing, which again was supportive of the pound. The MPC minutes released on Wednesday should provide further clarity in this regard; we expect a unanimous decision to hold fire on more QE.

In addition to being less dovish than expected on monetary policy, Mervyn King also stuck to his guns in arguing that UK growth is not as weak as headline data has suggested. King’s comments have increased hopes and expectations that the initial -0.7% GDP figure for Q2 will be revised up. This was supported by last week’s better than expected, although still alarmingly weak in the bigger picture, manufacturing and industrial production figures from June. If an improved GDP figure is not forthcoming on Friday 24th August, then sterling could well be hit hard.

ECB has done nothing so far but hopes remain high

Despite the ECB having failed to take any concrete action at its meeting at the start of this month, the euro remains well away from its late-July lows. This is largely thanks to ECB President Draghi’s indications that the central bank is gearing up to resume the purchasing of Spanish and Italian bonds, in an effort to bring down their unsustainably high borrowing costs.

However, while some short-term relief for the euro would likely follow some concrete action from the ECB, it will be no panacea. Bond-purchases will be tied to very strict conditions with respect to economic reforms. Mario Draghi has suggested that ECB bond-purchases would only occur once a country had requested help, but this request may not come if Germany is too strict with the conditions it attaches. At the very least, German demands may could easily delay progress. In any case, bond-purchases took place last year but we are back in panic mode once again, so we find it hard to believe that ECB action will provide anything more than a short-term lift for the single currency.

Despite the positive sentiment that has built towards the euro over the past few weeks, we continue to hold a distinctly bearish view of the single currency over the rest of 2012. While sterling has plenty of its own domestic issues, chief among which are ongoing weak growth and the threat of the UK losing its AAA credit rating, it should be able to climb higher towards €1.30 this year.

GBP/EUR is currently trading at €1.27 and another push higher may prove tricky in the short-term as GBP/USD is looking ripe for another downward correction. Despite ongoing debate within and outside the US Federal Reserve, the central bank is still resisting the urge to announce or even signal QE3. This case has been strengthened most recently by last month’s better than expected US labour market update. The dollar looks well-positioned for a return to strength this month then, which could bring the GBP/USD rate well down from the current $1.57 level.

End of week forecast

GBP / EUR 1.2750
GBP / USD 1.5550
EUR / USD 1.2250
GBP / AUD 1.5000

Richard Driver

Analyst – Caxton FX
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Market fears reach new heights as Spain edges closer to a sovereign bailout

The bad news for the euro just keeps on flowing. Spanish 10-year bond yields have now risen to a fresh euro-era high above 7.60%, which is a fairly accurate bellwether of market tensions that have built towards Spain and the debt crisis as a whole in recent sessions. Sustained yields above 7.0% pushed Greece, Portugal and Ireland into requesting a bailout and the chances of Spain following suit are rising all the time – another few weeks at current levels and Spain may have no choice but to ask for help.

Meanwhile, German 10-year bonds have recently fallen as low as 1.14%, and 6-month bond yields have even dipped in to negative territory; such is the appetite for safe havens, investors are actually willing to accept losses just to park their funds in the safety of German short-term debt.

The Spanish regional govenrment of Valencia has asked the central government for financial aid, and six other regions including Catalonia and Murcia are expected to do the same. Considering a €100bn bailout was only signed off for Spain’s crumbling bank sector on Friday, these signs of panic from Spain’s regions are the last thing Spanish PM Rajoy needs, particularly as he is trying to quell market fears by insisting that Spain will not require a full-blown sovereign bailout. Spain’s economy minister De Guindos is meeting his German counterpart Schaeuble today and there will be suspicions that a full sovereign bailout will be considered.

The IMF may well be hardening its stance on granting aid to failing eurozone economies, if the rumours of a possible withheld contribution towards Greece’s next aid tranche. So again, these Spanish headlines have come at unfortunate moment.

Spain is continuing to call for intervention from the ECB, De Guindos said on Saturday that "somebody has to bet on the euro and now, given the architecture of Europe isn't changed - who can make this bet but the ECB." If the ECB restarts its programme of buying up distress debt, then Spain can stop paying such high borrowing costs. The ECB has stood firm on this issue for nineteen straight weeks, claiming that the lead on solving the debt crisis should be taken by EU politicians. Stodgy progress in this regard is likely to force the ECB’s hand in the end, particularly as Italy edges closer to disaster.

Spain has major repayments to be made by October, so a full-scale Spanish bailout could well come before then. Amid all these concerns around Spain, Greece is heading towards the exit door, so it should to come as a surprise when we reiterate our bearish view of the euro.

Adam Highfield
Analyst – Caxton FX
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Caxton FX Weekly Outlook: further pain in store for euro

Spanish debt concerns drive GBP/EUR even higher

Spanish 10-year bond yields are up at 7.50% today, which represents yet another fresh euro-era high. One of Spain’s largest regional governments, Valencia, has requested financial help from the central government, and there are plenty of indications that more regions will follow suit. This has triggered widespread fears that the Spanish sovereign itself will need a formal bailout, in addition to the bailout that was signed off for the country’s banks on Friday. In addition, the Bank of Spain has said today that the country’s economy shrunk by 0.4% in Q2, in addition to its 0.3% contraction in Q1.

Greece is also back in the headlines this week; reports have emerged that the IMF may not contribute to the next aid tranche that the country needs by September to avoid insolvency. The IMF, along with the rest of the Troika, will be in Greece this week assessing the country’s spending cuts and reforms. The Troika seems highly likely to give a negative assessment of Greek progress.

On top of these debt–related issues, the week ahead presents plenty of risks for the euro in terms of economic data. Tomorrow’s set of eurozone, German and French PMI growth figures are expected to remain at very weak levels, in fact almost entirely in contraction territory. Wednesday brings a key German business climate survey, which is expected to hit a fresh-two year low. All of this negative eurozone data is likely to increase speculation as to another interest rate cut from the ECB early next month.

MPC minutes do little to hurt the pound

The MPC’s meeting minutes revealed a 7-2 vote in favour of the July quantitative easing decision, which is no great surprise in light of poor UK growth data, weak domestic inflation and rising risks from the eurozone. Sterling has actually weathered the recent domestic quantitative easing storm very well and we are not expecting another dose of QE in the next few months, if at all (provided a rapid deterioration in eurozone conditions can be avoided). An interest rate cut was discussed at the MPC’s last meeting, but we expect this will be the committees’ last resort and we are not expecting this will be utilized this year.

The week ahead brings the preliminary UK GDP figure for the second quarter of the year. Consensus expectations are of a 0.2% contraction and whilst an undershoot of this estimate would likely apply some short-term pressure on sterling, we still take a positive view of sterling moving forward, as we do of all safer-currencies.

The week ahead also brings the advance US GDP figure for the second quarter. A further slowdown is expected, though until the Fed makes some clear signals as to QE3, the dollar should remain on the offensive.

End of week forecast

GBP/EUR posted fresh 3 ½ year highs up towards €1.29 over the weekend and while the pair is trading only marginally above the €1.28 level at present, we expect new highs to be reached soon. €1.30 has come into view quicker than we expected and is now a realistic target in the coming fortnight. Heavy losses in the EUR/USD, which itself it trading at more than a two-year low below $1.21, have taken their toll on GBP/USD. Sterling has given back two cents to the dollar since last Friday, and is currently trading at $1.55. We expect this pair to revisit the $1.54 level in the coming sessions. Soaring peripheral bond yields should ensure global stocks remain under pressure, which is likely to pave the way for further dollar gains.

GBP / EUR 1.2925
GBP / USD 1.54
EUR / USD 1.1920
GBP / AUD 1.5200

Richard Driver
Analyst – Caxton FX
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The Swedish Krona has had a good run but the game could be up

Data has revealed that the Swedish economy took a surprise upturn in the first quarter of this year. This improved domestic economic performance has given the Riksbank the confidence to leave interest rates unchanged for the second consecutive meeting, though there remain calls for another cut within the central bank’s ranks.

A brighter picture in Sweden has coincided with a mild recovery in global equities and risk appetite, in the wake of May’s crisis of eurozone confidence. Greece has managed to form a coalition government and concerns surrounding a messy Greek default and exit from the eurozonehave eased, for the time being at least. Spain’s situation looked capable of spiralling out of control, with the country’s 10-year bond yields setting new euro-area records up above the dangerous 7.0% mark. Some progress has been made with regard to Spain; an agreement has been reached for the bailout of its banks and some unexpected decisions made at the recent EU Summit have eased some short-term concerns.

Whilst market confidence has turned distinctly negative in recent sessions, the positive Swedish data in recent weeks has provided plenty of support for the Swedish krona, suggestive of a strong second half of the year for the Swedish economy. However, we view the risks to market sentiment and developments in the debt crisis to be heavily skewed to the downside. As such we don’t see too much more upside for the krona from here over the next couple of months.

GBP/SEK

After this pair peaked close to 11.50 in mid-May, the krona has rebounded impressively over the past two months. Sterling has struggled against many of the riskier currencies in recent weeks. Global stocks have staged an impressive recovery from their May sell-off and the krona has tracked that bounce inrisk appetite.

Events in the UK have not helped sterling’s cause of late. Growth data has been consistently weak, suggesting there will be no swift bounce back out of the double-dip recession that the UK has found itself in. Data confirmed the UK economy contracted by 0.3% in Q1 and we expect another contraction in UK GDP in Q2. The Bank of England’s response to fading domestic activity has been to introduce yet more quantitative easing, which is of course a negative for the pound. This factor has contributed to GBP/SEK’s poor performance over the past couple of months.

The Riksbank decided to leave its interest rate at the current level of 1.50% in July. Only two votes out of six were in favour of another cut to the Riskbank’s base rate, with the majority satisfied with the upturn in Swedish activity. The Swedish economy grew by 0.8% between Q4 2011 and Q1 2012 and the Riskbank is expecting overall growth of 0.6% this year, up from previous estimates of 0.4%. We have seen some positive figures comes out of Q2 as well;Swedish industrial production rose by an impressive 3.0% in May, while industrial orders rose by 4.5%, which has sparked a good degree of optimism surrounding the Swedish growth outlook.

There remains plenty of reason for caution. Swedish unemployment is rising (up at 4.4% from 4.0%) and the Swedish economy remains very vulnerable to deteriorating eurozone conditions. This second factor will ensure that another interest rate cut later this year is always a possibility, but on balance we expect the Riksbank to hold fire. We don’t see much further downside for this pair and expect a bounce back above the 11.00 mark over the coming weeks.

EUR/SEK

This pair has come under some aggressive selling pressure in the past two months. The risks of economic disaster posed by the eurozone debt crisis are building every monthand this has seen the single currency take another sharp turn for the worse.

The short-term risks posed by Greece have eased now that a coalition government is in place but when the bailout term negotiations commence there is plenty of scope for alarm bells. Concerns over Spain have more than stepped in to fill the void; its banking sector has had to seek a bailout and despite significant progress at the recent EU Summit, Spanish bond yields remain dangerously close to 7.0%.

Investors are still sceptical towards the euro and rightly so – no long-term solution is in sight; the bailout funds are still insufficient, Germany continues to obstruct the introduction of Eurobonds, peripheral borrowing costs remain high and eurozone growth is contracting. Even the progress made at the recent EU Summit has been placed in doubt by the German constitutional court delaying ratification of the ESM changes and the fiscal pact. In addition, the euro’s yield differential has once again been reduced by a 0.25% ECB interest rate cut (to 0.75%) this month, with further monetary easing in the form of another rate cut or cheap loan offering likely this summer.

With the euro losing ground across the board, the SEK is shining out as a safer European alternative backed by stable domestic economic growth and low debt levels. There are plenty of rumours that the SEK is a popular target with the Swiss National Bank as it continues its project of recycling the euros it acquires whilst weakening the CHF.

This pair is trading at an 11 ½ half year low; whilst we do not expect any major progress in the eurozone over the next couple of months, we do expect to see this pair to benefit from a minor bounce after its sharp recent decline. The SEK remains vulnerable to major panic in the eurozone. A bounce up towards 8.80 over the coming weeks looks a good bet.

USD/SEK

As one of the safest currencies available, the US dollar has been a strong performer since early May, which has helped this pair continue the uptrend that has played out over the past year. Eurozone fears have reached new heights and the safe-haven dollar always strengthens in this environment.

The US dollar has not been without its own domestic issues though; the US economy slowed down sharplyover the first half of 2012, the Q1 GDP figure was revised down to 1.9% (y/y) from 2.2%. Consistently soft figures out of the US labour market in particular have ramped up speculation that the US Federal Reserve will announce a third round of quantitative easing (QE3). Regardless of the risks of QE3 this year though, we envisage enough safe-haven demand for the dollar to outperform.

We envisage plenty more gains for the US dollar in the second half of this year, with USD/SEK heading back up towards it recent highs around 7.30 in the coming few weeks, with fresh highs above 7.50 likely towards the end of Q3.

NOK/SEK

The Norwegian economy continues to shine, having grown by 1.1% in the first quarter of this year. The latest updates in terms of Norwegian manufacturing and industrial production were positive and retail sales growth was particularly impressive in May. There is no doubt that the Norwegian economy is proving extremely resilient to the global and eurozone economic downturn that has developed this year. Rising investment in Norway’s lucrative oil sector is providing steady support to growth and with forward-looking economic surveys looking positive;the Norges Bank has revised its GDP forecasts upward to 3.75% from 3.25% for 2012.

Clearly the Norges Bank has been eager to highlight the external threats to the Norwegian economy, most notably from the eurozone debt crisis. Indeed it stated in June that “turbulence and weak growth prospects abroad suggest the key policy rate should be kept on hold.”However, the Norges Bank is one of the few global central banks not inclined towards easier monetary policy and we currently expect an interest rate hike from the Norges bank around the turn of 2013. Of course, this will be highly sensitive to developments in the eurozone and how drastically this affects Norwegian exports.

The Norwegian krone is still a commodity currency and although Norway’s strong economic fundamentals have to a large extent offset the effects of declining oil prices on the krone, the slide has still weighed on the currency. Since the uncertainty triggered by the Greek elections in early May, the price of Brent crude has declined by almost 20% from $120 to under $100 per barrel.

This factor has contributed to a sharp downward correction in the NOK/SEK rate, dragging it down from two-year highs above 1.20 to current levels just above 1.14. We consider these levels to be much too low and are confident that we will see a strong bounce off these lows up towards 1.18 over the next few weeks.

Richard Driver
Analyst – Caxton FX

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Euro drops on the back of central bank action

This Thursday (5, July 2012) saw the Bank of England announce that it would be increasing its quantitative easing (QE) programme by £50bn, taking the total QE to £375bn. However, the lack of movement in the markets suggest that it was fully priced in.

The market moving news from yesterday was of course the European Central Bank (ECB) announcement to cut rates, with the main refinancing rate cut to 0.75% and the deposit rate to 0%, both down 25 basis points. The rate cuts were as expected but the markets took a fairly dim view on the action taken. Trading was volatile and the GBP/EUR rose from 1.244 to 1.254 in the wake of the announcement, now pushing its three-and-a-half year high.

The cutting of the deposit rate is designed to encourage banks to lend as they would now receive no interest on money deposited with the ECB overnight. Mario Draghi said in his statement that the eurozone was likely to show little or no growth and his downbeat outlook did not help the euro or those countries that have been struggling of late.

Spanish 10-year bonds have today reached levels over 7% and threaten to rise higher. 7% and above is considered by many as a dangerous, as well as an unsustainable level of borrowing costs, and was the level at which other countries, such as Ireland, had to request a bailout.

We also saw a surprise interest rate cut from the People’s Bank of China, an indication that growth in the world's second largest economy is slowing more than Beijing had previously expected. The last time the People’s Bank of China cut interest rates was shortly before poor economic data was released, maintaining its strategy of acting pre-emptively ahead of poor data. This most recent cut comes a week before a range of Chinese economic figures are due to be announced, possibly indicating a retracement in growth.

All eyes now turn to today’s announcement of US non-farm employment data due out at 1.30pm. Forecasts anticipate the data to show the number of people in employment grew to 97,000 this month, rising from 69,000 previously.

A positive announcement could lead the US dollar to be investors’ choice of currency and boost demand for the greenback, with traders lodging positions for the weekend. Should the data be worse than expected, we may also see currency flows toward the greenback, as investors become wary of the global economic condition and seek shelter with the relatively-safe US dollar.

The news will also have an impact on a number of other currencies, including the Aussie dollar and New Zealand dollar, with investors' risk appetite heavily reliant on US economic indicators.

Adam Highfield 
Analyst, Caxton FX

Caxton FX July Currency Report: EUR, USD, GBP

Euro enjoys some respite but looks poised for another decline

It’s been a volatile few weeks with market sentiment chopping and changing, amid several important eurozone and US developments. Despite increasingly poor US growth data, the market was deprived the decision from the US Federal Reserve to introduce quantitative easing. Global economic growth in general is on a clear downtrend trend and investor confidence remains extremely fragile as a result.

From the eurozone though, we have at least seen some rare progress. The second attempt at the Greek general election produced the ‘least worst’ result and a coalition government has finally been formed. This development has eased short-term concerns of a messy default and a ‘Grexit’ but the real progress is yet to be made. Greece still needs to find a way of renegotiating the crippling terms of its bailout agreement, though Merkel’s tough stance provides plenty of scope for deadlock.

Euphoria relating to the avoidance of a Greek disaster (for now) was short-lived, with concerns towards Spain quickly taking hold. Spain’s bailout request for its troubled banks comes amid a host of downgrades to both the sovereign and its banks’ credit ratings, while soaring government bond yields threaten to force Spain itself into a bailout request.

Crucially, the results of the recent EU Summit exceeded expectations by some distance. Commitments were made on a more flexible use of the EU’s rescue funds in the sovereign bond markets (though details were conspicuous in their absence). Importantly, the EU rescue funds will be able to shore up Spain’s banks directly rather than being channeled via the government’s already debt –laden books. It was also confirmed that those loans would not have senior creditor status, easing concerns from private bondholders that they would be last in the queue for debt repayments.

June was an eventful month in terms of the UK economy as well, with speculation rife over Bank of England monetary policy. The Monetary Policy Committee made no changes in June, though the minutes from its meeting and subsequent comments were very revealing as to its next move. David Miles, the lone dove in favour of quantitative easing in May was joined by three other MPC members in June. We are expecting the pro-QE camp to secure a majority at its meeting this week, though the impact on sterling should be minimal.

GBP/EUR

Sterling poised for higher climbs against the euro

Sterling has edged higher against the single currency, which continues to suffer from the pressures of the debt crisis. Whilst EU leaders have made some steps in the right direction of late, we still see stalling eurozone progress pushing sterling higher against the single currency.

Sterling’s gains may be a little surprising given that news from the UK economy has been consistently negative; the UK manufacturing and construction sectors remain in the doldrums, while UK services sector continues to grow but is unable to pick up the slack. Data out of the labour market has been typically poor and the Q1 GDP contraction has been confirmed as -0.3%. Disappointingly, the Q4 GDP figure for 2011 was revised down from -0.3% to -0.4%, though such backward-looking data was not damaging to sterling.

There have been some small pockets of optimism, with UK retail sales bouncing back impressively from April’s collapse but as emphasised by Bank of England policymakers in recent weeks, the risks posed by the eurozone debt crisis are great and the UK’s prospects are highly uncertain. Overall, UK growth data over past three months (Q2) points is indicative of another contraction in UK GDP, so the double-dip recession rolls on.

Accordingly, we now fully expect the MPC to introduce another round of quantitative easing at its next meeting on July 5th. The UK inflation rate dropped from 3.0% to 2.8% in May, which along with ever-increasing concerns over UK growth as expressed in last month’s MPC minutes, seems almost certain to push the MPC into additional monetary stimulus this week. With regard to a cut to the BoE’s record-low interest rate of 0.50%, the issue has certainly been discussed by the MPC but QE is looking the preferred route to supporting the domestic economy at present.

EU leaders take some steps in the right direction

Unsurprisingly, conditions in the eurozone were extremely volatile in June and this will doubtless remain the case in July. While New Democracy may have secured a narrow victory in the re-run of the Greek general election and formed a coalition government, the renegotiation of Greece’s bailout agreement is bound to place Greece uncomfortably under the spotlight once again in the coming weeks. Greece’s negotiations with the Troika over its bailout terms are expected to take place on July 24th, so expect some major uncertainty around this date.

Importantly, the EU Summit has eased concerns surrounding Spain by producing an agreement to allow the EU’s rescue fund to directly recapitalise its banks, rather than adding to the sovereign’s debt to GDP ratio and driving up its borrowing costs. Market players were also extremely relieved to learn that bailout loans to Spanish banks will not be granted senior creditor status and that the eurozone rescue funds will be used more flexibly to allow peripheral bond-buying.

Nonetheless, the euro has been sold after its recent rally, which goes to show the scepticism and doubts that remain with regard to the future of the eurozone. Growth-wise in Q2, the euro-area could be looking at the worst quarterly growth figure in three years. There are also still huge implementation risks to the decisions that were made at the EU Summit, as shown by Finland and the Netherland’s recent pledge to block any bond-buying by the eurozone’s bailout funds.

The eurozone’s €500bn bailout resources are still inadequate and Merkel continues to stand firm against the introduction of Eurobonds. Progress was certainly made at the EU Summit but they were crisis management decisions, rather than decisions which can fundamentally change the direction of the debt crisis. No long-term solution is in sight and in addition, the ECB is set to reduce the euro’s yield differential this week by cutting its interest rate from 1.00% by at least 0.25%.

In short, we remain bearish on the euro and continue to favour the safety of sterling. There should be several opportunities to buy euros with the interbank above €1.25, while there is a significant chance of seeing this pair test its 3 ½ year highs of €1.2575.

GBP/USD

Sterling looking vulnerable against the greenback after strong run

The US dollar traded rather softly for much of June, which was not wholly surprising given the huge rally it enjoyed in May. The dollar has been held back by profit-taking in the wake of the USD’s May rally. It has also been hemmed in by fears (or hopes, depending on your exposure) that the US Federal Reserve will decide to usher in further quantitative easing (QE3). QE3, if it comes, will boost risk appetite away from the US dollar as investors target higher-yielding assets.

In its June 20th meeting and subsequent announcement, the Fed decided not to pull the trigger on QE3 and the dollar responded positively as you would expect. US data has without doubt increased the chances of QE3; figures from the retail and manufacturing sectors have been particularly disappointing, while consumer sentiment has also taken a turn for the worse. Most importantly as far as the Fed is concerned, key growth data from the US labour market weakened for the fifth consecutive month in June. Nonetheless for now, the Fed is keeping its powder dry with regard to QE3, holding it back to deal with a potentially even greater deterioration in US growth.

US dollar to bounce back

As shown by the knee-jerk response to the recent EU Summit, progress on the eurozone debt crisis can always lift market confidence to weaken the dollar. However, as shown by the market’s fading post-Summit enthusiasm, investors are proving increasingly hard to convince.

We think that the tough resistance that EUR/USD is meeting at levels above $1.27 will hold, which should usher in a move lower and possibly a retest of May’s lows below $1.24. GBP/USD is meeting resistance at $1.57 and we also think this resistance level will hold, making a move lower for this pair equally likely. We consider current levels to be a strong level (in the current circumstances) at which to buy dollars, with the rate heading back down to $1.55 in July.

Monthly Forecasts

GBP/EUR: €1.2550
GBP/USD: $1.55
EUR/USD: $1.24

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

Euro rallies on EU Summit, but the positivity is already waning

EU Summit far exceeds market expectations, fuelling euro rally

Market confidence in the build-up to last week’s EU Summit was pretty much at rock bottom. Angela Merkel’s continued tough stance on eurobonds seemed to indicate a wider deadlock between Germany on one side and struggling eurozone nations such as France, Spain and Italy on the other.

In the early hours of Friday morning, EU chief Herman Van Rompuy announced several decisions which gave risk appetite and market sentiment a major boost. Two key questions left by the Spanish bank bailout deal were answered. First, the bailout funds will be able to directly recapitalize Spain’s banks, without adding to the debt-to-GDP ratio of Spain as a whole and forcing its borrowing costs up. Second, the bailout loans will not be given senior creditor status, easing concerns that private bondholders will not see their investments completely written off. In addition, pledges were made that the bailout funds will be able to invest in
distressed bonds directly, again relieving concerns around the Italian and Spanish bond markets.

Clearly the markets were impressed by these decisions and they certainly buy some more time but they don’t amount to a silver bullet solution to the debt crisis by any stretch of the imagination. We still lack any detail on the fundamental issue of longer-term fiscal union and whilst the bailout resources can be used more flexibly now, though its size remains inadequate.

ECB and BoE both set to make moves this week

ECB Chief Economist Peter Praet stated recently that “there is no doctrine that interest rates cannot fall below 1 percent.” Comments such as these lead us to believe that the ECB is set to cut its already record-low 1.00% interest rate to 0.75%. There is a significant risk that the ECB will cut rates to 0.50%, in light of weak eurozone growth data and fading inflationary risks. Whilst the market is likely to be grateful that the ECB is taking action, the reduction in the euro’s interest rate differential is likely to be a negative for the single currency in the longer-term.

We expect the Bank of England to introduce further quantitative easing on Thursday, in light of the distinctly dovish tone within last month’s MPC minutes and the four votes in favour of QE that they revealed. Only one more dovish voter is required for a majority in favour of QE and we believe this will come on Thursday. The move looks to be fully priced in though, so sterling has already taken the pain in relation to this move. Wednesday’s UK services figure will be watched closely on Wednesday, a slowdown is expected.

The dollar has suffered a significant sell-off amid booming risk appetite in the aftermath of the EU Summit. We maintain a bullish outlook for the US dollar moving forward, although the week ahead brings with it significant risks. Friday’s US non-farm payroll is expected to show a mild improvement but amid the softness in US growth data of late it would be no surprise to see the result undershoot expectations.

The euro’s rally has already run out of steam; GBP/EUR is trading up above €1.2450 and EUR/USD’s has pared back from $1.27 to below $1.26. We continue to target levels well above €1.25 for sterling. A further decline in the EUR/USD pair will surely weigh on GBP/USD, which is coming up against stiff resistance around $1.57.

End of week forecast
GBP / EUR 1.2550
GBP / USD 1.54
EUR / USD 1.2475
GBP / AUD 1.57

Richard Driver

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

Spain requests bailout and adds to the euro’s woes

Spain formally requested assistance from its Eurozone partners on Monday, in light of the continued deterioration of its domestic banks. Luis de Guindos, the Spanish Economy Minister, sent the letter to Jean-Claude Juncker, who heads the group of Eurozone finance ministers, in the hope of obtaining a bailout loan thought to be in the region of €100bn. However, a lack of detail over the size of the bailout is a source of considerable market uncertainty. The news was fully expected following weeks of speculation over the condition of Spanish banks, and following the first call for help on 9th June.


What is also a source of nerves is where the bailout funds will come from. The recent bank restructuring in Ireland could be used as a precedent, in which case the loans would be channeled from the existing bailout fund, the European Financial Stability Mechanism, into Spain’s Fund for Orderly Bank Restructuring (Frob), which in turn will direct the money to those banks that need it. In this model, the loans would rank equally with private bondholders. If the loans come from the European Stability Mechanism, the new bailout fund, they will rank as senior debt and with the Greek haircuts fresh in the memory, the result would be investors hitting Spain will higher borrowing costs. The former option looks to be the likely choice. Another key concern is that as the bailout loans are likely to be channeled through Spain’s government, this means adding billions to Spain’s sovereign debt and increasing the country’s debt-to-GDP ratio considerably (from 70% to 80%). Again, this will have implications in Spain’s credit rating and borrowing costs.

These two factors are already an issue; Moody’s has downgraded Spanish debt to Baa3 (one higher than ‘speculative’), as well as issuing 28 fresh downgrades to Spain’s banks yesterday. This has resulted in a rise in the yield on Spanish 10-year debt to 7%, the government appears to be edging towards a sovereign bailout. Whilst in the short-term a bailout of the eurozone’s fourth largest economy would be a huge source of huge panic, a Spanish bailout may be the kick that EU leaders need to finally break ground on a long-term path to solving the debt crisis. Only time will tell.

So how has the euro responded? The Greek election result provided only a temporary respite and with the ongoing issue of the Greek bailout renegotiation ahead Spain edging closer to disaster, market tensions are rising. The euro has suffered a downwards correction in the past few sessions, dipping from $1.27 to $1.25, and allowing GBP/EUR to climb from €1.24 to €1.25. We maintain a negative outlook for the euro.

The EU Summit at the end of this week provides ample opportunity to calm market nerves, though the track record of these crisis meetings producing major progress is not a good one. Merkel has been typically stubborn on issues such as mutualised debt (Eurobonds) and with the Greek PM ill, no progress is likely to be made on the Greek bailout issue. Decisions with regard to Spain will be crucial if stocks are to avoid a further sell-off and if building pressures in the bond markets are to ease. The euro could be poised for a move lower.

Adam Highfield

Caxton FX

Spain confirms bailout request and the euro heads lower

The euro’s recovery shows signs of topping out in absence of QE3

The first three weeks of June were excellent ones for the euro but the past three sessions have punishing ones for the single currency. The Fed’s decision last Wednesday night not to pull the trigger on QE3, much to the disappointment of many market players, has seen the dollar strengthen significantly.

We also saw some awful economic data out of the eurozone at the end of last week. Monthly German manufacturing growth hit almost a three year-low, a German business climate survey hit a two-year low and growth data from the eurozone as a whole was distinctly poor as you might expect.

The Spanish Economy Minister has today formally requested a bailout to recapitalize its ailing banking sector, though the details as to the size of this bailout have not yet emerged. Unless funds well in excess of the €100bn bailout (which has been assumed) are offered, then market fears of an insufficient bailout are likely to persist. What we also do not know is whether the bailout will be granted via the Spanish government or whether the sovereign will be bypassed. The likelihood is that Spain will shoulder the loans, which will add to the country’s mounting debt. It is hard for the market to respond positively to this bailout, as it is just a liquidity solution; the fundamental issue of rising debt remains unaddressed. To add to the negative sentiment towards Spain, Moody’s is expected to downgrade Spain’s credit rating once again this week.

EU leaders meet at a summit at the end of this week to tackle issues relating to Greece, Spain, a banking union, Eurobonds and much more. The market has today demonstrated its lack of faith that any groundbreaking progress will emerge from the EU Summit, with the euro declining sharply, Spanish and Italian bond yields rising and global stocks tumbling. Market confidence is very much on the wane, which is all good news for the US dollar.

MPC minutes point to QE call in July

Last week’s MPC minutes provided a surprise in revealing a 5-4 split (against QE) in the vote on whether to introduce more QE in June, after a voting pattern of 8-1 against in May. Posen had made it clear that he had jumped ship from the dovish camp prematurely, so his QE vote was expected. However, the additional voting shifts from BoE Governor Mervyn King and Paul Fisher were a genuine surprise. In light of the surprise decline in UK inflation from 3.0% to 2.8% in May, as well as the overtly dovish language expressed in last week’s minutes, we fully expect the doves to gain a majority in the quest for more QE in July. This should not weigh on the pound though, as a July move is fully priced in.

The week ahead brings familiarly high levels of risk, with Spain and Italy both having to auction off some debt. The EU Summit is the main event and the potential for disappointment is all too clear. Because of this, sterling is trading at €1.2450 – a strong rate, which could well get even better by the end of the week. With BoE monetary easing now fully expected next month, the downside risks posed by UK data releases look rather limited. As ever, EU leaders have the capacity to trigger a major relief rally for the euro, though we remain sceptical.

Sterling has lost ground to the US dollar in recent sessions, hurt by a significant shift down in the EUR/USD pair. GBP/USD is now trading below $1.56 and we expect to see the dollar strengthen further this week.

End of week forecast
GBP / EUR 1.2475
GBP / USD 1.55
EUR / USD 1.2425
GBP / AUD 1.57

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.

Spanish banks get some help but Greek elections loom

Pressures ease somewhat as Spanish banks receive €100bn bailout

The weekend headlines have revealed that Spain’s banks will be given the support they desperately need through €100bn of emergency EU funding. This is a decent signal of intent from the EU’s leaders; it buys Spain some time and eases concerns surrounding spiraling debt contagion in the eurozone, but it is far from a solution for Spain, never mind the eurozone as a whole. Indeed, the enthusiasm following the weekend’s bailout agreement already appears to have waned.

Growth-wise, eurozone data over the past fortnight has pointed evermore towards a dip back into negative territory in Q2 of 2012. Pressures are still very much being felt in the bond markets, with Spanish 10-year notes yielding almost 6.50% and Italy’s equivalent debt yielding almost 6.00%. Last week’s policy announcement from the ECB was notable in revealing that the central bank is reluctant to cut interest rates from the current 1.00% level. Perhaps more importantly ECB President Draghi is unwilling to step in and buy bonds on the secondary market. The ECB has made it clear that it will not fill the void left by the EU’s dithering leaders.

With Spain’s short-term pressures easing somewhat, the Greek saga comes back into view. This Sunday (June 17th) brings the Greek parliamentary elections, where there remains a significant risk of an anti-bailout coalition emerging. Feasibly, we could see another stalemate and another election called. The situation is incredibly uncertain and looks set to put the market on edge as the event draws closer.

Bank of England decides against QE, for now

Last week saw the Bank of England’s MPC decide against introducing another round of quantitative easing in June. The threat of more QE has been weighing on sterling of late, particularly amid a slew of weak UK growth figures. However, a surprisingly solid UK services figure may well have given some of the MPC policymakers the resolve to hold off on voting for more QE last Thursday. The minutes from the meeting, released next Wednesday, will clearly be very revealing on just how close the MPC’s call on QE was. For now though, sterling looks set to find some favour - it’s safe-haven status should be able to return to the fore as the Greek elections close in.

Elsewhere, US data has continued to point to a slowdown in recent weeks, though Ben Bernanke was unwilling to provide any clues as to the introduction of QE3 any time soon, which is dollar-supportive. He stressed the risks posed by the eurozone debt crisis to the US economy but his rhetoric smacked of a willingness to ‘wait and see.’

Sterling is trading at €1.24, with the euro having totally given back the gains it made on Sunday night as a result of the Spanish bailout progress. Nerves look likely to intensify ahead of the weekend’s Greek elections and as investors contemplate the possibility of a Greek exit from the eurozone once again, we are looking for sterling to climb back up towards €1.25 in the coming sessions.

Likewise we are looking for lower levels for EUR/USD. The euro’s relief rallies are proving more and more flimsy now as the debt crisis goes on. Another look at $1.24 is a distinct possibility, but for now it trades a cent and a half higher. A weaker EUR/USD pair will inevitably weigh on the GBP/USD pair, which currently trades at $1.5530. Whilst we believe sterling should be able to take a decent share of the safe-haven flows this month, we still view anything above $1.55 as a bit lofty.

End of week forecast
GBP / EUR 1.25
GBP / USD 1.5450
EUR / USD 1.2450
GBP / AUD 1.5800

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

Doom and gloom on the domestic front but GBP remains popular

The perpetual threat to the global financial system that is Greece has dominated the headlines in recent weeks. The country’s May 6th elections saw the ruling pro-bailout coalition fail to secure sufficient support from Greece’s angry electorate. This ushered in a month of huge uncertainty as the market looked ahead to another Greek election on June 17th; with speculation growing that Greece’s anti-bailout parties would curry enough favour to form a coalition. The logical result of a rejection of Greece’s second bailout agreement would be default and an exit from the euro, so it should come as no surprise that the euro suffered further declines.

The pound was a key beneficiary of these euro declines, despite the negative implications that the eurozone debt crisis has on the already dire state of the UK economy. Recent data not only confirmed that the UK entered a double-dip recession in Q1, but it contracted by 0.3% rather than the 0.2% initially estimated. Taken with April and May’s growth figures, which are pointing to a soft start to Q2, this has unsurprisingly triggered fresh speculation that the MPC will edge back towards introducing more quantitative easing in the second half of the year. We are doubtful in this regard, for now.

Sterling is trading at impressive levels against the euro and despite a period of profit-taking in the past week or so, it remains at strong levels against the majority of global currencies thanks to its safe-haven, euro-alternative tag. However, as usual there is one currency sterling can’t outperform in the strongly risk averse trading conditions that characterised most of May – the US dollar. The dollar has helped itself to some easy and significant gains across the board as the eurozone debt crisis forces market players to unwind their riskier positions in favour of the safest of assets.

GBP/EUR

Sterling remains firm and continues to threaten higher climbs against the euro, as conditions in the eurozone go from bad to worse. Uncertainty, as ever, is the buzz word. The pro-bailout New Democracy Party has edged ahead in the Greek opinion polls, which has lifted market hopes that the country can receive the additional funding it needs and remain ‘safely’ within the eurozone. But there is plenty more debate to be had in Greece and few will be truly confident of a positive result ahead of the fresh elections on June 17th. Yet another Greek election is a distinct possibility.

The chances of a messy ending to the Greek saga remain very high. Even if a pro-austerity, pro-bailout coalition does emerge out of this month’s elections, they will still have to find a way to deliver the major reforms and deficit reduction that the country’s €130bn bailout agreement requires – no mean feat. The EU Commission has recently reminded Greece that its bailout payments remain highly contingent but whoever wins this month’s elections, you can expect some desperate efforts to have the bailout terms relaxed to a significant degree.

Spain rings alarm bells

Greek concerns, though likely to return to the fore as the elections draw closer, have been put on the back burner for the time-being. True to form, another struggling eurozone nation has stepped up to fill the void – Spain, or more specifically, Spain’s banking sector. Bankia, Spain’s fourth-largest bank, requires €19bn worth of recapitalisation and it is becoming more and more apparent that Spain will need help to shore up its banking sector as a whole. The issue is having a significant impact on Spain’s government borrowing costs, with 10-year bond yields climbing dangerously towards the unsustainable 7.0% level.

As ever with this debt crisis, market fears build so much that they tend to become a self-fulfilling prophecy. In short, Spain is in very serious trouble and its government has admitted as much – requesting EU help with bank capitalisation. This is no minor development given that Spain is the eurozone’s fourth-largest economy and emergency help for Spain will inevitably turn the market’s gaze towards the third-largest – Italy.

UK economy still looks frail

The UK economy is looking particularly downbeat at present, having been hit with the confirmation that it is firmly in double-dip recession territory. Unsurprisingly, consumer confidence has taken a sharp downturn and weakness in UK growth figures has become alarmingly consistent. The last update from the UK labour market was a little more encouraging but we will need to see more than one good month before hoping for sustained improvements.

Amid all of this bad domestic economic news, as well as the grave threats posed by the eurozone debt crisis, it might be assumed that more quantitative easing is bound to be introduced by the Bank of England in order to drag the UK out of recession. Certainly the IMF has made its views known on the issue, encouraging the BoE to act soon to safeguard the UK economy.

However, the noises out of the MPC have not suggested that such a move is imminent, despite the recent sharp decline UK inflation from 3.5% to 3.0%. A key reason for this is that the BoE sees UK inflation in the medium term as equally likely to exceed its 2.0% target as undershoot it. In addition, Spencer Dale has recently stressed the argument that the recent quantitative easing doses are still feeding through to provide stimulus and that a further round is not appropriate at present. This position is supported by the recent improvement in UK money growth.

With only one MPC policymaker voting in favour of QE at the MPC’s May meeting, in the form of David Miles, there is plenty of dovish recruitment to be done in the coming months if the BoE is to pull the trigger again on further monetary easing. Sterling seems safe in this regard for June at least, though eurozone risks could feasibly escalate sufficiently to prompt BoE action in July or August.

Euro to weaken further

So, despite the UK economy sitting uncomfortably in a double-dip recession and facing a prolonged period of stagnant growth and ultra-low interest rates, sterling looks free to continue taking advantage of an increasingly euro-negative environment. Some major steps towards EU fiscal union will be required to ease market sentiment, and the obstacles to this are all too clear.

Sterling/euro hit heights of €1.2575 in mid-May but has come off those highs to the current level of €1.24. We envisage further gains for the relative safe-haven pound in June, with the Greek elections and rising Spanish bond yields providing plenty of motivation to exit the euro. €1.26 is a realistic target in the coming few weeks.

GBP/USD

Whilst sterling has enjoyed something of an easy ride against the troubled euro, against the US dollar it has been an altogether different story. Again, market uncertainty best explains the US dollar’s stellar performance in May. It’s fair to say that the market is in a state of panic at the moment, concerned with a ‘Grexit’ and most recently a ‘Spexit.’ Amid such monster question marks, there has been widespread flight to the safest assets such as the US dollar. Sterling may be markedly a safer alternative to the single currency, but its safe-haven status cannot compare with that of the greenback.

The rug has finally been pulled from underneath the EUR/USD pair. The scale of the eurozone’s current problems is now being reflected in the price of the euro; EUR/USD has declined by over 5.0% from $1.3150 to $1.25 in the space of just one month. We do see the EUR/USD pair considerably lower in the coming months, which will inevitably weigh on the GBP/USD pair.

The US dollar is not without its own domestic economic concerns, with recent data confirming that the US economy grew at an annualised pace of 1.9% in Q1, down from the initial estimate of 2.2% and well down from Q4 2011’s 3.0% pace of growth. Progress in the US labour market has also slowed right down, which has once again seen speculation that the US Federal Reserve will introduce QE3 step up a gear. Whilst the US economy is stalling as we enter the summer, it is still firmly in recovery mode. We continue to hold the view that the Fed will want to gather more evidence about the US recovery’s direction before pulling the trigger on more quantitative easing, so we view the current QE3 concerns as over-hyped.

Safe-haven dollar to outperform

Sterling has recently revisited January’s lows below $1.53, having suffered a 6.5% drop against the US dollar in the space of just four and a half weeks. Sterling has finally bounced against the US dollar and is currently trading at $1.55, but we think this will prove temporary. A consolidation period was always likely after such a steep drop, but we should see lower levels tested once this current bout of profit-taking on the dollar’s recent rally has run its course. Lower levels in the $1.51-1.52 area could well be seen in June as the negative eurozone headlines once again take their toll.

Caxton FX one month forecast:

GBP / EUR : 1.26

GBP / USD : 1.5150

EUR / USD : 1.2050

Richard Driver

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

Sterling/Euro June Report

Sterling has continued to rally against the euro in recent weeks, as conditions in the eurozone go from bad to worse. Uncertainty, as ever, is the buzz word. The pro-bailout New Democracy Party has edged ahead in the Greek opinion polls in the past week or so, which has lifted market hopes that the country can receive the additional funding it needs and remain ‘safely’ within the eurozone.  But there is plenty more debate to be had in Greece and few will be truly confident of a positive result ahead of the fresh elections on June 17^th.

The chances of a messy ending to the Greek saga remain very high. Even if a pro-austerity, pro-bailout coalition does emerge out of this month’s elections, they will still have to find a way to deliver the major reforms and deficit reduction that the country’s €130bn bailout agreement requires. The EU Commission reminded Greece earlier this week that its bailout payments remain highly contingent but whoever wins this month’s elections, you can expect some desperate efforts to have the bailout terms relaxed to a significant degree.

Greek concerns, though likely to return to the fore as the elections draw closer, have been put on the back burner for the time-being. True to form, another struggling eurozone nation has stepped up to fill the void – Spain, or more specifically, Spain’s banking sector.  Bankia, Spain’s fourth-largest bank, requires €19bn worth of recapitalisation and it is becoming more and more apparent that Spain will need help to shore up its banking sector. The issue is having a significant impact on Spain’s government borrowing costs, with 10-year bond yields climbing dangerously towards the unsustainable 7.0% level. As ever with this debt crisis, market fears build so much they become a self-fulfilling prophecy. In short, Spain is in very serious trouble and may have to seek external help, which is no small issue given it is the eurozone’s fourth-largest economy and will inevitably turn the market’s gaze towards the third-largest – Italy.

The UK economy is looking particularly downbeat at present, having been hit with the confirmation that it is firmly in double-dip recession territory. Unsurprisingly, consumer confidence has taken a sharp downturn. April’s growth data from the services and manufacturing sectors was poor and a gauge of UK retail sales showed the worst figure in almost four years. The last update from the UK labour market was a little more encouraging but we will need to see more than one good month before hoping for sustained improvements.

Amid all of this bad domestic economic news, as well as the grave threats posed by the eurozone debt crisis, it might be assumed that more quantitative easing is bound to be introduced by the Bank of England in order to drag the UK out of recession. Certainly the IMF has made its views known on the issue, encouraging the BoE to act soon to safeguard the UK economy.

However, the noises out of the MPC have not suggested that such a move is imminent, despite the recent sharp decline UK inflation from 3.5% to 3.0%. A key reason for this is that the BoE sees UK inflation in the medium term as equally likely to exceed its 2.0% target as undershoot it.  In addition, Spencer Dale has recently stressed the argument that the recent quantitative easing doses are still feeding through to provide stimulus and that a further round is not appropriate at present. This position is supported by the recent improvement in UK money growth.

With only one MPC policymaker voting in favour of QE at the MPC’s May meeting, in the form of David Miles, there is plenty of dovish recruitment to be done in the coming months if the BoE is to pull the trigger again on further monetary easing. Sterling seems safe in this regard for June at least, though eurozone risks could feasibly escalate sufficiently to prompt BoE action in July or August.  

So, despite the UK economy sitting uncomfortably in a double-dip recession and facing a prolonged period of period of stagnant growth and ultra-low interest rates, sterling looks free to continue taking advantage of an increasingly euro-negative environment. Sterling/Euro climbed a further two cents in May, leaving this pair with gains over 4.0% in the past two months. We envisage further gains for the relative safe-haven pound in June, with the Greek elections and rising Spanish bond yields providing plenty of motivation to exit the euro.

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 opinion polls provide some hope but confidence still fragile

Greek opinion polls give the market some hope

The euro was given some relief in early Monday trading by the positive news that in Greece, the conservative and pro-austerity party - New Democracy – has edged ahead of the anti-bailout party Syriza in the opinion polls. If New Democracy can hang on to their lead and re-establish a pro-bailout, pro-austerity and pro-euro coalition, then fears of a Greek exit should subside. Judging by the euro’s brief and fairly minor bounce since the weekend though, the market remains understandably cautious.

Concerns over Spain are also growing, as the country’s ten year bond yields climb towards 6.50%, bringing into view the dangerous 7.0% benchmark which forced other peripheral nations, like Portugal and Greece, into requesting bailouts. Spain’s fourth-largest lender Bankia requires a bailout and the Spanish region of Catalonia is also in need of help to refinance its debt. Consequently, the risks of a Spanish sovereign bailout are increasing, which would create a huge amount of stress on the EU’s aid resources, as well as raising major question marks over Italy.

In addition to these mounting Spanish concerns, growth data from the eurozone was all pointing the wrong way last week. Figures from the German, French and eurozone-wide services and manufacturing sectors almost all disappointed, suggesting that the eurozone’s avoidance of economic contraction in Q1 will prove temporary.

With respect to the issue of Eurobonds, Germany doesn’t look like it will budge. What’s more, Austria, the Netherlands and Sweden have joined Germany in expressing their opposition to the idea of common eurozone bonds, so market hopes for a silver bullet have once again been quashed.

US GDP figure should confirm slowdown

This week brings two important growth figures from the US, in the form of the revised GDP estimate for the first quarter of 2012 (due on Thursday). The figure is expected to be revised down from 2.2% to 1.9%, well off Q4 2011’s impressive quarterly reading of 3.0%. Friday brings the monthly update from the US labour market and improvements in this area are expected to be moderate at best.

The US dollar’s safe haven status has very much come to the fore in the past month. Clearly ongoing softness in US figures keeps QE3 on the table as far as the Fed is concerned but we see safe-haven demand helping it appreciate further across the board. In particular, we foresee heavy losses for EUR/USD in the second half of this year, which will inevitably drive GBP/USD lower too.

Sterling is trading up above €1.25 this afternoon, with the positivity surrounding the Greek opinion polls already having dissipated. Sterling weathered some awful data last week, including a downward revision to the UK’s Q1 GDP figure to -0.3% and a steep drop in the domestic inflation rate. However, sterling’s safe-haven status still looks likely to push it even higher against the euro.

In contrast, sterling is always going to be under pressure against the US dollar. It should benefit from a minor short-covering bounce soon, though a return anywhere close to $1.60 looks a stretch now. Risk appetite away from the US dollar is likely to be hard-pushed to return in force ahead of the June 17th Greek elections.

End of week forecast
GBP / EUR 1.26
GBP / USD 1.5750
EUR / USD 1.25
GBP / AUD 1.6050

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

Monthly Report: GBP/EUR and GBP/USD

Sterling has performed excellently in the past month, hitting fresh multi-month highs almost across the board. Some notably less dovish Monetary Policy Committee (MPC) minutes provided the trigger for a sterling rally in April, with the market subsequently betting against the likelihood of further Bank of England (BoE) quantitative easing (QE) - a key factor which has weighed on the pound over the past seven months.

The Office of National Statistics (ONS) last week announced the disappointing news that the UK economy contracted by 0.2% in the first three months of 2012. Taken with Q4 2011’s 0.1% contraction, this latest GDP figure signalled the UK having entered a technical recession. Nonetheless, sterling continues to enjoy strong demand as circumstances worsen on the continent.

The US dollar is still struggling to capitalise on its economy’s comparative strength. US growth data has fallen off its impressive uptrend somewhat, as shown by April’s softer unemployment figures and the recent undershoot in the first quarter US GDP figure.

This has played into the hands of the more cautious members of the US Federal Reserve, including Chairman Ben Bernanke, who refuse to rule out the possibility of another round of US quantitative easing. The market is becoming increasingly obsessed with the Fed’s monetary policy outlook and ongoing QE3 speculation continues to hurt the dollar’s performance.

The eurozone’s debt and growth situation is looking no better and worryingly, perhaps as a result of this lack of progress, the eurozone has become embroiled in fresh political uncertainty. French President Nicholas Sarkozy, could well suffer electoral defeat on the 6 May, whilst Greece will be holding parliamentary elections on the same date. Both elections could have significant ramifications on the direction of eurozone debt crisis in the short and long-term.

GBP/EUR

April saw sterling finally break away from the €1.21 level that had proven so sticky in the year to date. News out of the eurozone has been distinctly negative of late but unusually, the latest direction in this pair wasn’t predominantly euro-driven, but the result of much-improved sentiment towards the pound.

Economically, the situation in the UK remains extremely shaky. While April’s growth figures from the manufacturing, construction and services sectors were all encouraging and retail sales growth was staggeringly strong, the UK GDP figure for Q1 revealed a disappointing 0.2% contraction.

The market appears to be more than a little sceptical with regard to the ONS’s findings and will be looking for an upward revision to the GDP figure on 24 May. Regardless, the headlines surrounding a ‘double-dip recession’ are likely to weigh on consumer and business confidence alike.

UK suffers the double-dip

Whether or not the UK is indeed in a technical recession, UK growth will remain extremely weak in 2012. Disappointingly, Moody’s has recently placed doubt over the likelihood of any economic boost to the UK as a result of the London Olympics in the summer. The eurozone crisis continues to pose the greatest risk to the UK economy. As shown by the latest UK manufacturing figures, export orders are slowing and the eurozone’s economic contraction will undoubtedly drag on domestic activity.

The good news for sterling, however, is that its appeal is not based on economic growth potential. Sterling still represents a convenient alternative to investors looking to exit the euro but stay within Europe. Sterling is also a currency over which there is no threat of intervention looming (unlike the Japanese yen and the Swiss franc).

Despite the recent double-dip headlines, the UK government has reiterated its commitment to the austerity path, in order to maintain the faith of both the credit rating agencies and investors, thus keeping borrowing costs low. As a result, sterling’s ‘second tier’ safe-haven status has really come to the fore in the past few weeks and will provide plenty of support as the debt crisis rolls on.

MPC steps away from QE

Most importantly, sterling is now a currency over which there is perceived to be a reduced threat of quantitative easing, which contrasts particularly with the US dollar. The minutes from the MPC’s April meeting revealed that Adam Posen did not vote for additional QE, which took the market very much by surprise and left only David Miles as the solitary voter for additional monetary easing.

After a slight increase in UK inflation up to 3.5% in March, the MPC increased its medium-term inflation projections. The MPC’s apparent preoccupation with UK price pressures, over and above the state of UK growth, has seen bets on the likelihood of further QE from the BoE scaled back. With the MPC likely to remain in wait and see mode’ at its May meeting on 10 May, the pound has gone from strength to strength. Beyond this month though, there remain significant risks that the more pro-QE arguments will resurface to haunt the pound.

Downside risks to the euro

With regard to the single currency, events in the eurozone over recent weeks have certainly weighed on confidence, though not as much as one might expect. Growth data from Germany, France and the eurozone as a whole disappointed in April and another quarterly contraction is likely to be announced on 15 May. This will put the eurozone in the same boat as the UK - in technical recession. However, there’s no doubt the eurozone faces greater downside risks to growth than the UK moving forward and its recession is almost certain to continue through Q2.

Last month’s Spring IMF meeting failed to convince the markets that EU leaders have a proper handle on the EU’s ongoing crisis. The region’s ‘financial firewall’ has been bolstered by a further $430bn, which is a significant development. However, rating agency S&P has recently seen fit to downgrade eleven Spanish banks, which has seen Spanish and Italian 10-year bond yields make their way back up towards the dangerous 6.00% mark -a good bellwether of rising market tensions.

These rising tensions can largely be put down to fresh political concerns. 6 May brings the second and final round of the French presidential election. Nicholas Sarkozy is facing a likely defeat by Socialist candidate Francois Hollande, which places huge uncertainty over the EU’s Franco-German leadership, the EU’s fiscal compact and its ‘austerity first’ position.

Meanwhile in Greece, parliamentary elections threaten to prevent the country’s two leading pro-bailout parties from securing a majority, which again casts uncertainty over Greece’s bailout situation. In addition, the Dutch government’s collapse as a result of disagreements over austerity measures is telling of a growing political discontent across the region. There is a significant risk that the austerity backlash could spread to the UK local elections this week but the government is nonetheless unlikely to be derailed on its commitment to deficit-reduction.

GBP/EUR has climbed by over 2.50% in the past month, hitting fresh multi-month highs up to this week’s peak above €1.23 (the highest since July 2010). We are looking for further gains in the rate as conditions in the eurozone continue to deteriorate, with the €1.25 (80p) level representing the first key target.

GBP/USD

The US dollar remained soft in April, hemmed in by weaker US economic data and ongoing dovish rhetoric from US Federal Reserve Chairman Ben Bernanke. The monthly US jobs figure for March revealed that half as many jobs were added to the payrolls compared to February and US GDP data for the first quarter of 2012 came in at a disappointing 2.2% (annualised), against expectations of a 2.6% reading. Clearly the US economy is recovering at a far stronger pace than what we are seeing in the UK but it is the implications that this slower pace of growth (the US economy grew at a pace of 3.0% in Q4 2011) has with regard to the US Federal Reserve monetary policy.

The Fed was slightly brighter in its analysis of the US economy last month but is highly likely to remain in ‘wait and see mode’ for the foreseeable future. Bernanke has repeatedly put the brakes on any over-optimistic projections of US growth and has reminded the market that if the pace of US growth softens further from its current moderate pace and progress on the labour market issue stagnates, then QE3 is still very much on the table. Every time Bernanke emphasises the possibilities of QE3, the dollar sells off as risk appetite is boosted and investors chase higher yielding assets, such as the Australian dollar or stocks and shares.

The US dollar has found some favour in the past couple of sessions, helped by a stronger US manufacturing figure. However, a slide in the EUR/USD pair as a result of poor growth figures from the eurozone (Italy in particular) has proven more influential.

It has been difficult calling a top to the GBP/USD’s recent rally in the year to date. It must be said that with the recent poor UK growth figures in mind, doubts are likely to creep in with regard to the likelihood that the MPC will resist further QE this year. This may make this pair’s 8-month high of $1.63 a tough level to breach. We continue to anticipate that EUR/USD will fall through the $1.30 threshold this quarter and whilst sterling should hold up better against the dollar by comparison, a significant decline remains likely. Therefore, we are anticipating GBP/USD to ease back towards the $1.60 level, from the current rate below $1.62.

Richard Driver
Currency Analyst
Caxton FX

Euro vulnerable ahead of crucial eurozone elections

UK enters a technical recession but sterling still flying high

The preliminary reading of the UK’s Q1 GDP figure came in last week to reveal a 0.2% contraction, which triggered a wave of headlines regarding the UK economy having entered a double-dip recession. Still though, the pound is on the offensive across the board, which is really a reflection of its growing safe-haven demand.
There is widespread scepticism with regard to the latest GDP figure and many, including us, are expecting an upward revision towards the end of May. What’s more, the figure does little to change the Bank of England’s monetary policy outlook as the MPC had already recognized the risks of Q1 contraction and appear confident that growth will pick up this year. The UK government’s response has been to reaffirm its unwavering commitment to keep the UK’s international borrowing costs low through ongoing austerity measures - a popular stance with the market.

The UK’s monthly set of growth figures will roll out over the next few days and readings of the manufacturing, construction and services sector are expected to show a slowdown. Judging by the performance of sterling in the past fortnight though, next Thursday’s BoE quantitative easing decision represents the next major domestic risk event. The MPC is likely to remain in wait and see mode next week, regardless of the UK’s economic slump in the past three months.

US growth slows down to strengthen Bernanke’s dovish position

The first quarter US GDP figure came in at 2.2% (annualized) last week, well below the 2.6% reading that was anticipated. Whilst clearly outpacing the UK economy, this slowdown is playing into the hands of the more dovish members of the US Federal Reserve, particularly Chairman Ben Bernanke. Bernanke stated that US monetary policy is “more or less in the right place” at the moment and interest rate hikes aren’t expected for at least another couple of years. However, Bernanke has once again emphasized that the door remains well and truly open to a third round of quantitative easing and it is this factor that continues to hurt the US dollar.

This Friday brings the monthly US non-farm payrolls figure, the most important indicator of growth in the world’s leading economy. A weaker number is expected, so it is unlikely that the US dollar, in the short-term, will return to strength on the basis of domestic economic strength. However, the US dollar will remain a safe-haven target if eurozone nerves jangle again, as they may well do as the weekend approaches.

French and Greek elections come into focus

Eurozone jitters are likely to increase ahead of the weekend’s final French and Greek elections. Sarkozy’s rival Hollande is looking favourite to win the French presidential election, while there is chance that Greece’s two major parties (the current coalition) will fail to secure a majority. Amid this huge political uncertainty, we may well see the euro struggle this week.

Sterling is trading up towards €1.23 this week, which is the result of a 2.5% climb for this pair in the past month. Further gains for GBP/EUR look probable. Sterling is trading marginally off an eight-month high of $1.63, which is still an excellent level at which to purchase USD. There may be room for a little more upside in the short-term but a weaker EUR/USD should eventually drag on GBP/USD.

End of week forecast
GBP / EUR 1.24
GBP / USD 1.6350
EUR / USD 1.31
GBP / AUD 1.57

Richard Driver

Currency Analyst

Caxton FX