The monthly figure for UK manufacturing growth has come in well below expectations and sterling has understandably plummeted as a result. Going into today’s session, sentiment towards the UK economy was tentative at best given last week’s first quarter GDP figure of 0.5%. Anything less than 0.5% would officially have put the UK economy back in recession.
The market would have been looking for a clean sweep of positive UK data this week, and this morning’s drastic undershoot only increases the pressure on growth elsewhere. With growth in services and construction expected to slow, risks are certainly to the downside on sterling.
The MPC will make its monthly rate statement on Thursday, and no change in the 0.5% BoE rate is anticipated. With arch-hawk Andrew Sentance set to leave the MPC this month, a BoE rate rise this summer is looking increasingly unlikely.
The ECB is also making its monthly rate decision on Thursday, and whilst the market consensus is that it will follow last month’s rate hike in June, there is a small chance it will tighten policy again this week. Eurozone inflation is well above the official target, and the ECB (unlike the BoE) has shown it is more concerned with maintaining price stability than with safeguarding economic growth. In all likelihood it will be Trichet’s press conference on Thursday that will hold focus, as the market looks for firmer indications that the ECB will raise rates again next month.
Having fallen through robust support levels against the euro at €1.12, sterling looks highly vulnerable to further losses this week. Moreover, it is difficult to pinpoint a catalyst for a sterling turnaround unless this week’s figures show some unexpected growth.
All eyes are on tomorrow morning’s UK construction figures then. Sterling is in dire need of a surprise acceleration in growth. As always, comments are welcomed.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Showing posts with label Trichet. Show all posts
Showing posts with label Trichet. Show all posts
Tuesday, 3 May 2011
Thursday, 7 April 2011
BoE sticks, ECB twists.
Today it was announced that the BoE left the interest rate unchanged at 0.5%, whilst the ECB announced a quarter percent rate rise to put the eurozone base rate at 1.25%. Given that these decisions were widely predicted, the market response to the news has been somewhat muted.
The ECB press conference was of more interest. Trichet’s comments may not have triggered any significant movements but we do think they could have signalled an end to the euro uptrend that we have seen over the past month. Trichet refused to commit to a further rate rise, adopting a wait-and-see approach. If anything his comments suggested that the rate rise was more at the “once-and-done” end of the spectrum than, the “first-of-several” end.
Significantly, Trichet omitted the phrase “strong vigilance” with regard to monitoring inflation levels, reflective of a less ECB hawkish stance. He certainly reiterated that price pressures would be closely watched, but there’s reason for uncertainty surrounding ECB monetary policy going forward, which contrasts with broad expectations that the BoE will hike rates at least by July.
As well as a broadly euro-negative ECB press conference, the single currency has also come under some pressure today in light of last night’s Portuguese bailout request. Talk of the markets turning their attention on to Spanish debt issues has created a renewed air of uncertainty around the eurozone’s fiscal problems. We have held the view over recent weeks that the euro is overvalued and today’s announcements appear to have given further credence to this view.
In other news, Japan’s misery continues as another earthquake strikes the northeast of the country. It’s fortunately not on the same scale as last month’s quake so we can be hopeful that there’ll be considerably less devastation caused. Global stocks have fallen on the news but the currency markets remain as yet unpeturbed.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
The ECB press conference was of more interest. Trichet’s comments may not have triggered any significant movements but we do think they could have signalled an end to the euro uptrend that we have seen over the past month. Trichet refused to commit to a further rate rise, adopting a wait-and-see approach. If anything his comments suggested that the rate rise was more at the “once-and-done” end of the spectrum than, the “first-of-several” end.
Significantly, Trichet omitted the phrase “strong vigilance” with regard to monitoring inflation levels, reflective of a less ECB hawkish stance. He certainly reiterated that price pressures would be closely watched, but there’s reason for uncertainty surrounding ECB monetary policy going forward, which contrasts with broad expectations that the BoE will hike rates at least by July.
As well as a broadly euro-negative ECB press conference, the single currency has also come under some pressure today in light of last night’s Portuguese bailout request. Talk of the markets turning their attention on to Spanish debt issues has created a renewed air of uncertainty around the eurozone’s fiscal problems. We have held the view over recent weeks that the euro is overvalued and today’s announcements appear to have given further credence to this view.
In other news, Japan’s misery continues as another earthquake strikes the northeast of the country. It’s fortunately not on the same scale as last month’s quake so we can be hopeful that there’ll be considerably less devastation caused. Global stocks have fallen on the news but the currency markets remain as yet unpeturbed.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Friday, 18 March 2011
Crunch Time: EU Summit
Next Friday’s EU Summit marks a self-imposed deadline for eurozone leaders to reach an agreement on a “comprehensive package” to deal with the region’s fiscal problems. Progress was made earlier than expected at the preliminary Summit last weekend, and the markets responded positively – perhaps too positively if Trichet’s recent pessimistic comments are anything to go by.
Most significantly, EU leaders reached an agreement to expand the European Financial Stability Fund (EFSF). However, the more realistic tones coming out of the Summit are stressing that “the devil is in the detail” and whilst broad principles were agreed, the financial technicalities involved in actually implementing those principles pose a huge obstacle to concrete commitments.
Certainly, the enlarged bailout fund is a step in the right direction but it is more difficult for the EU member states to agree in what proportions they should contribute. One would assume larger states such as France and Germany would shoulder the burden but their national publics are growing tired of this ‘duty.’ Another issue surrounds the continuation of the ECB’s bond-buying role instead of allowing the EFSF to buy bonds on the secondary market, which Trichet feels particularly aggrieved about. Superseding all of this is the fact that the EFSF is set to expire in 2013, with the European Stability Mechanism to replace it, so agreement on the shape of this longer-term fund is paramount next week.
Coming into this month, the markets were cynical as to progress on EU debt issues. However, with Trichet turning up the heat on EU leaders (indicating borrowing costs would be increased in April with an ECB interest rate hike) we saw greater political commitment last weekend and increased market confidence followed. The euro has strengthened against the US dollar and sterling accordingly, despite several recent peripheral credit downgrades and very high bond yields.
It is possible that agreement on a “comprehensive package” next week will trigger a strong euro rally next week, persuading the markets that the eurozone debt problem can finally be put to rest. More likely though, in this risk adverse environment, is that the markets will greet an agreement positively but remain broadly cautious on the euro. Any gains will be incremental as markets await further proof that the situations in Portugal, Spain and Greece will improve. Sterling is likely to suffer against the single currency if the Summit is successful, at least in the short term, given that the ECB is almost certain to raise interest rates before the BoE. However, the pound should continue to outperform the US dollar, tracking euro strength.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Most significantly, EU leaders reached an agreement to expand the European Financial Stability Fund (EFSF). However, the more realistic tones coming out of the Summit are stressing that “the devil is in the detail” and whilst broad principles were agreed, the financial technicalities involved in actually implementing those principles pose a huge obstacle to concrete commitments.
Certainly, the enlarged bailout fund is a step in the right direction but it is more difficult for the EU member states to agree in what proportions they should contribute. One would assume larger states such as France and Germany would shoulder the burden but their national publics are growing tired of this ‘duty.’ Another issue surrounds the continuation of the ECB’s bond-buying role instead of allowing the EFSF to buy bonds on the secondary market, which Trichet feels particularly aggrieved about. Superseding all of this is the fact that the EFSF is set to expire in 2013, with the European Stability Mechanism to replace it, so agreement on the shape of this longer-term fund is paramount next week.
Coming into this month, the markets were cynical as to progress on EU debt issues. However, with Trichet turning up the heat on EU leaders (indicating borrowing costs would be increased in April with an ECB interest rate hike) we saw greater political commitment last weekend and increased market confidence followed. The euro has strengthened against the US dollar and sterling accordingly, despite several recent peripheral credit downgrades and very high bond yields.
It is possible that agreement on a “comprehensive package” next week will trigger a strong euro rally next week, persuading the markets that the eurozone debt problem can finally be put to rest. More likely though, in this risk adverse environment, is that the markets will greet an agreement positively but remain broadly cautious on the euro. Any gains will be incremental as markets await further proof that the situations in Portugal, Spain and Greece will improve. Sterling is likely to suffer against the single currency if the Summit is successful, at least in the short term, given that the ECB is almost certain to raise interest rates before the BoE. However, the pound should continue to outperform the US dollar, tracking euro strength.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Wednesday, 16 March 2011
Eurozone crisis still bubbling under the surface
The crisis in Japan is understandably dominating the headlines in the financial markets as the impact on the global economy is contemplated. Aside from this, the state of emergency in Bahrain is also providing reason for the markets to remain in a heightened state of nervousness. The country’s debt rating has been cut to BBB by Moody's and there remains the possibility of an Iranian militarily intervention if the protests escalate.
Although it’s not dictating market direction at present, bubbling under the surface (and surely soon to come back under the spotlight) remains the eurozone debt crisis.
After last weekend’s EU Summit, the markets responded positively to news that EU leaders agreed to expand the European Financial Stability Fund to €440bn euros, which will now have greater capacity to cope with further euro-area bailouts. But Trichet’s comments this week suggest that the markets may have got overexcited about the weekend’s early progress. Trichet dismissed the agreement as “insufficient” and it’s quite clear that in order to reach the “comprehensive package” there are some serious obstacles to be overcome. It remains to be seen whether the agreement can actually pass through the European Parliament and whether the populations of large eurozone countries, such as Germany and Austria, can be convinced to increase their financial commitments.
Portugal’s credit rating was downgraded by Moody’s yesterday, and the euro suffered accordingly. A Portuguese bailout seems on the cards and a Greek default is certainly probable in the coming months. Any perceptions of a new safe-haven currency in the form of the euro – as was seen in City AM this morning - are wholly misguided; the downside risks to the euro in coming months clearly outweigh its upside potential.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Although it’s not dictating market direction at present, bubbling under the surface (and surely soon to come back under the spotlight) remains the eurozone debt crisis.
After last weekend’s EU Summit, the markets responded positively to news that EU leaders agreed to expand the European Financial Stability Fund to €440bn euros, which will now have greater capacity to cope with further euro-area bailouts. But Trichet’s comments this week suggest that the markets may have got overexcited about the weekend’s early progress. Trichet dismissed the agreement as “insufficient” and it’s quite clear that in order to reach the “comprehensive package” there are some serious obstacles to be overcome. It remains to be seen whether the agreement can actually pass through the European Parliament and whether the populations of large eurozone countries, such as Germany and Austria, can be convinced to increase their financial commitments.
Portugal’s credit rating was downgraded by Moody’s yesterday, and the euro suffered accordingly. A Portuguese bailout seems on the cards and a Greek default is certainly probable in the coming months. Any perceptions of a new safe-haven currency in the form of the euro – as was seen in City AM this morning - are wholly misguided; the downside risks to the euro in coming months clearly outweigh its upside potential.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Friday, 4 March 2011
Sterling heading lower following ECB fireworks
So, a comparatively quiet non-farm payroll Friday draws a hectic week to a close, lending us the opportunity to take stock of a major shift in market sentiment and to look ahead to next week’s activity. Thursday’s disappointing UK services sector figures were overshadowed by events in Europe. In response to eurozone inflationary pressures, ECB President Trichet’s groundbreaking remarks on the likelihood of a rate hike within the next month placed the euro firmly on the front foot against all its counterparts.
With the ECB now well ahead of the BoE in terms of rate hike expectations, sterling looks set to weaken to levels potentially as low as 1.1360 against the euro in the coming weeks and months, though it should remain stable against a broadly weaker US dollar. With the single currency reaching a one-month high against sterling today, investors have clearly (and understandably) responded very positively to Trichet’s hawkish tones. However, perhaps greater caution would be sensible as a rate hike could yet prove highly damaging for the eurozone’s periphery members, where bond yields and unemployment remain harmfully high and growth remains elusive. The prospect for higher rates offers investors a greater return and has lifted euro demand, but, if they cause deepening debt crises in the PIIGS, the prospects for the European economic recovery, and therefore the euro, will suffer considerably.
Taking a longer term view, the market at this stage is only pricing in a single rate hike from the ECB this year (April) in order to bring eurozone inflation back to target (2.0%), however, markets are pricing in up to three UK rate rises this year, which could give sterling the edge in later months.
After this week’s excitement, we are likely to see something of a lull next week with few major data releases or announcements due. Following the heightened volatility that has epitomised the past few sessions, it will be interesting to see whether a broader trend of euro strength is consolidated. The market’s sole focus will on Thursday’s Bank of England rate statement, where investors will watch for any clues of an unlikely replication of the ECB’s hawkish response to inflation. Whilst UK inflation is at a far more alarming level than that of the eurozone (4.0% vs 2.4%), the majority of the MPC voters seem determined to maintain their ‘wait-and-see’ approach with regard to the effects of austerity measures on the UK’s stubbornly fragile recovery. No change to the 0.5% UK interest rate is therefore widely expected. That said, no one was seriously entertaining the idea that a rate rise from the ECB would be brought forward by five months this week!
In the US, today’s Non-Farm employment results for February met positive expectations and further evidenced the promising signs of economic recovery that we’re seeing on the other side of the Atlantic. Nonetheless, a radical improvement, which remains highly unlikely, will be necessary before the Federal Reserve decides to change course from its strong commitment to keep rates at record lows. It is this factor which limits sterling’s downside risks against the dollar and provides hope of a long-term continuation of this year’s gradual GBP/USD strengthening.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
With the ECB now well ahead of the BoE in terms of rate hike expectations, sterling looks set to weaken to levels potentially as low as 1.1360 against the euro in the coming weeks and months, though it should remain stable against a broadly weaker US dollar. With the single currency reaching a one-month high against sterling today, investors have clearly (and understandably) responded very positively to Trichet’s hawkish tones. However, perhaps greater caution would be sensible as a rate hike could yet prove highly damaging for the eurozone’s periphery members, where bond yields and unemployment remain harmfully high and growth remains elusive. The prospect for higher rates offers investors a greater return and has lifted euro demand, but, if they cause deepening debt crises in the PIIGS, the prospects for the European economic recovery, and therefore the euro, will suffer considerably.
Taking a longer term view, the market at this stage is only pricing in a single rate hike from the ECB this year (April) in order to bring eurozone inflation back to target (2.0%), however, markets are pricing in up to three UK rate rises this year, which could give sterling the edge in later months.
After this week’s excitement, we are likely to see something of a lull next week with few major data releases or announcements due. Following the heightened volatility that has epitomised the past few sessions, it will be interesting to see whether a broader trend of euro strength is consolidated. The market’s sole focus will on Thursday’s Bank of England rate statement, where investors will watch for any clues of an unlikely replication of the ECB’s hawkish response to inflation. Whilst UK inflation is at a far more alarming level than that of the eurozone (4.0% vs 2.4%), the majority of the MPC voters seem determined to maintain their ‘wait-and-see’ approach with regard to the effects of austerity measures on the UK’s stubbornly fragile recovery. No change to the 0.5% UK interest rate is therefore widely expected. That said, no one was seriously entertaining the idea that a rate rise from the ECB would be brought forward by five months this week!
In the US, today’s Non-Farm employment results for February met positive expectations and further evidenced the promising signs of economic recovery that we’re seeing on the other side of the Atlantic. Nonetheless, a radical improvement, which remains highly unlikely, will be necessary before the Federal Reserve decides to change course from its strong commitment to keep rates at record lows. It is this factor which limits sterling’s downside risks against the dollar and provides hope of a long-term continuation of this year’s gradual GBP/USD strengthening.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Thursday, 3 March 2011
Trichet slams inflation, bolstering euro
“An increase of interest rates in the next meeting is possible.” So spoke Jean-Claude Trichet at the ECB’s press conference earlier today. This, and similarly hawkish comments throughout the conference, have brought forward market expectations for an ECB rate rise by five months! The market now expects to see the ECB move the base rate from 1.00% to 1.25% at their meeting in on April 7th.
As detailed in my previous blog-post there were rumours that Trichet would be overtly hawkish in calling for the inflationary pressures to be quashed. He did not disappoint. Indeed he went above and beyond expectations stating that “strong vigilance” is required.
The upshot of all this? The euro has had a storming day! Against all 16 of its major counterparts the single currency has climbed, hitting a fresh four month high versus the US dollar at $1.3974, breaking strong resistance at $1.3950. It has also put the sterling price back to 1.1650.
The reasoning behind this sharpened rhetoric from Trichet comes from higher inflation, stemming from rocketing oil prices (and other commodities), which have pushed inflation levels above the ECB’s 2% target.
Adding to sterling’s woes, the pound stumbled following a disappointing reading of activity in the UK services sector, undoing the improved sentiment seen earlier in the week off the back of positive manufacturing and construction data.
The services PMI index fell to 52.6, down from an 8-month high of 54.5, underperforming market expectation.
Although the figure doesn’t exactly signal Armageddon (all key industries are still in expansionist territory), weak fundamentals and jitters about the stability of the economy will leave the pound vulnerable to investors paring back their expectations for an interest rate hike.
So what does this all mean going forward? I fear that we have may seen a game changing statement today. Sterling’s prospects against the euro do not look nearly as healthy as they did yesterday. We still feel that further upside against the US dollar is due, though this move will likely be one of dollar weakness. Downside risks for sterling/euro have swung into view…
Ewdard Knox
Analyst - Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Wednesday, 19 January 2011
The euro advances against the dollar
The euro continued to make significant gains against the US dollar today. Further rumours about Middle East and Russian buyers of European debt helped send the single currency higher, while weak housing data from the states dragged the greenback lower.
EUR/USD briefly went above $1.35 to hit an eight week high of $1.3537. A report in a German newspaper outlined a prospective new restructuring plan for Greece. The report said that the German government was drawing up a plan to allow the Greeks to buy back their own debt using a eurozone bailout fund. The report has been denied by the German parliament.
The seventeen-nation currency has had a few positive blips recently, through the ZEW figures yesterday, speculation of sovereign wealth funds purchasing EU debt and JC Trichet alluding to an increase in the EU’s interest rate. However, the macro issues affecting the region are still prevalent and should set the overall tone for the year. Any boost the euro has received since the start of the year is surely just band-aids re-attaching a dismembered limb.
Is everything going to be okay in Europe or is this simply another calm before another storm? Please add any thoughts and comments below.
Tom Hampton
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
EUR/USD briefly went above $1.35 to hit an eight week high of $1.3537. A report in a German newspaper outlined a prospective new restructuring plan for Greece. The report said that the German government was drawing up a plan to allow the Greeks to buy back their own debt using a eurozone bailout fund. The report has been denied by the German parliament.
The seventeen-nation currency has had a few positive blips recently, through the ZEW figures yesterday, speculation of sovereign wealth funds purchasing EU debt and JC Trichet alluding to an increase in the EU’s interest rate. However, the macro issues affecting the region are still prevalent and should set the overall tone for the year. Any boost the euro has received since the start of the year is surely just band-aids re-attaching a dismembered limb.
Is everything going to be okay in Europe or is this simply another calm before another storm? Please add any thoughts and comments below.
Tom Hampton
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Friday, 11 June 2010
Sterling brushes off weak production figures
Figures released from the UK manufacturing industry this morning have disappointed, with production down 0.4% in April, undershooting market expectations.
Although the data missed forecasts by a considerable margin, the year-on-year rate remains in positive territory. UK industrial production mirrored this figure, also disappointing expectations and failing to reflect the positive numbers seen from the Purchasing Managers’ indices recently. Reaction to this latest economic news has been rather unpronounced within the markets, with investors looking at the equity markets to dictate direction.
Duncan Higgins, senior analyst at Caxton FX says, “These figures will serve as a stark reminder that the UK economic recovery is still far from assured. Although the majority of UK fundamentals are still trending upwards, the upcoming budget measures are going to provide a significant hurdle.”
Sterling has come off its highs following the release, but remains holding around €1.21.
“The pound’s foundation above €1.20 remains intact, with data continuing to have only a minimal impact on the currency markets. Investors remain focused on wider developments from the eurozone at present, which is keeping sterling on a solid footing,” comments Higgins.
In spite of the weak figures today, we expect that sterling could progress higher over the short term.
Duncan Higgins concludes, “The euro is still suffering from a severe lack of market confidence, and despite the efforts of ECB President Trichet to calm fears, investors remain sceptical. The single currency can only achieve brief rallies, and these are predominantly based on profit taking as opposed to any real shift in sentiment.”
At present sterling is trading at €1.21, and is around half a cent down on the day against the US dollar at $1.4650.
Although the data missed forecasts by a considerable margin, the year-on-year rate remains in positive territory. UK industrial production mirrored this figure, also disappointing expectations and failing to reflect the positive numbers seen from the Purchasing Managers’ indices recently. Reaction to this latest economic news has been rather unpronounced within the markets, with investors looking at the equity markets to dictate direction.
Duncan Higgins, senior analyst at Caxton FX says, “These figures will serve as a stark reminder that the UK economic recovery is still far from assured. Although the majority of UK fundamentals are still trending upwards, the upcoming budget measures are going to provide a significant hurdle.”
Sterling has come off its highs following the release, but remains holding around €1.21.
“The pound’s foundation above €1.20 remains intact, with data continuing to have only a minimal impact on the currency markets. Investors remain focused on wider developments from the eurozone at present, which is keeping sterling on a solid footing,” comments Higgins.
In spite of the weak figures today, we expect that sterling could progress higher over the short term.
Duncan Higgins concludes, “The euro is still suffering from a severe lack of market confidence, and despite the efforts of ECB President Trichet to calm fears, investors remain sceptical. The single currency can only achieve brief rallies, and these are predominantly based on profit taking as opposed to any real shift in sentiment.”
At present sterling is trading at €1.21, and is around half a cent down on the day against the US dollar at $1.4650.
Thursday, 5 February 2009
ECB keeps rates on hold at 2%
In a scheduled announcement the European Central Bank has kept rates on hold at 2%. Analysts had been expecting this decision, as ECB President Jean-Claude Trichet had previously hinted that the next rate cut would not come until March.
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