Weekly Market Analysis - UK Economic figures drive GBP to gains against most currency pairings, whilst the eurozone takes a more dovish tone following the World Bank and IMF meetings last weekend.

GBP
The UK unemployment rate dropped to a five-year low of 6.9% on Wednesday
which reinforced positive Manufacturing data from a week earlier. GBP/USD rose
to the highest level since 2009 in what is a clear sign of economic confidence
developing in the UK economy. This has put more pressure on the Bank of
England at their next meeting to at least discuss an interest rate rise. However,
there is not a distinct timeline for a rate increase at the moment, as the Bank of
England altered their forward guidance framework last fall to look more broadly
at economic indicators before committing to a more definite timeline. Next week,
the major events on the economic calendar are the MPC Asset Purchase Facility
Votes and MPC Official Bank Rate Votes on Wednesday, followed by the Retail
Sales m/m figures on Friday.

EUR
Mario Draghi stated in New York this last weekend after the IMF and World
Bank meetings that further strengthening of the euro would require additional
ECB intervention because of the low level of inflation in the eurozone. The
international community has overwhelmingly expressed their concern to Draghi
about the low rate of growth in the eurozone and that measures need to be
taken to boost economic growth in the region. Any instability or sign of an
economic decline in the eurozone would have negative ramifications for global
markets because of the eurozone’s central role within the global economy.
Mario Draghi has stated that if further action is taken, it will be an interest rate
cut which precedes further quantitative easing. Draghi is due to speak at a
conference in Amsterdam on Thursday and may provide more clues as to the
further action that the ECB has planned.

USD
The dollar’s performance was weakened over the last week largely thanks
to Janet Yellen making a distinction about the likelihood of an interest rate
rise. During a speech last week, the Federal Reserve chairwoman included
in her comments that there will be a ‘considerable time’ between the end
of Quantitative Easing and the first interest rate rise. This undermined her
comments from the Federal Reserve meeting on March 19th where she said that
an interest rate rise may follow as early as six months after the end of the QE
Programme. The more dovish tone from Yellen has given the Federal Reserve
more breathing room as the Fed continues to voice their concerns about the
sluggish economic recovery, rather than the need for a higher interest rate.

End of Week forecast –

GBP/EUR – 1.2250

GBP/USD – 1.6890

EUR/USD – 1.3770

GBP/AUD – 1.7900

Nicholas Ebisch
Corporate Account Manager
Caxton FX

April 2014 Currency Report: Will the ECB finally take action?

Market sentiment towards the pound has shifted over the month as investors begin to reassess the likelihood of tighter policy from the BoE. Considering the strength of the pound over the last few months, it is not surprising that we are beginning to see a correction in the GBP/USD rate. With sterling starting the month in a more vulnerable position, upcoming data needs to at least be in line with estimates in order to support the currency.

Demand for the euro resurfaced towards the end of last month. The latest flash inflation estimate has shown price pressures eased further to 0.5%y/y. For yet another month, the market remains firmly focussed on the ECB and whether the latest reading will have any impact on their stance. Considering their forecasts into 2016 suggest inflation will rise, we doubt the central bank will alter policy when they meet later this week.

In the first FOMC meeting since Janet Yellen became Fed chair, comments from the central banker suggested the Fed has more of a hawkish bias than previously thought. This has put the greenback in a better position to begin the month, and another strong payroll figure could encourage more significant dollar buying. Further comments from FOMC members will be watched closely in order to gauge whether Yellen’s comments regarding tightening were a slip of the tongue or other members also carry a more hawkish view.

The market pares back sterling holdings

The pound has advanced significantly over the past few months especially against the greenback and this has been fuelled by rate expectations in the first half of 2015. Over the past few weeks however, demand for the pound has eased and investors are reviewing their holdings of the currency. The market now feels the currency has advanced too quickly and some market participants are paring back their expectations of tighter policy.

The inflation rate has also fallen considerably and the latest reading showed price pressure continued to ease. As long as inflation remains below the 2% the BoE will be justified in its stance to keep interest rates at its current lows. Therefore we doubt there will be any shift in policy from the central bank this month. UK data will need to remain broadly positive in order to keep the currency competitive as the market looks to penalise the pound for any disappointing UK figures.

GBP/EUR

Deflation worries haven’t faded yet

Last month the single currency was supported by the preliminary reading which showed Eurozone inflation edged higher to 0.8% y/y. This reading was revised back to 0.7% y/y but with the latest figure showing inflation fell further to 0.5% y/y there is no evidence just yet that price pressures are building. We know from the central bank’s projections that the governing council still expect inflation to head towards their 2% target, with price pressures just below the benchmark by 2016. With this in mind, it is unlikely that the ECB ease policy further when they meet in the next few days. Downside risks have yet to materialise and medium to long term expectations remain firmly anchored reducing the likelihood of any change in stance from the central bank. Nevertheless, as long as inflation remains around 0.7% the question of whether further easing is necessary will remain.

Asian buyers continue to support the single currency and as long as Eurozone data comes in at least in line with estimates, we suspect the push for lower levels in GBP/EUR and higher in EUR/USD will continue. It will also be interesting to see whether the ECB take this opportunity to talk down the euro. The central bank has avoided verbally weakening the currency but at the last meeting, ECB President Draghi shed some light on the effect a stronger euro is having on inflation. Until the bank outright objects to the euro’s strength we doubt investors will hesitate to boost the currency further.

GBP/USD

Can the greenback keep momentum?

Last month we witnessed a shift in rhetoric from the Federal Reserve and this was enough to at least get the market to buy dollars. In the last Fed meeting, Chair Yellen suggested that we may see US interest rates rise within the first half of next year. The central bank have said interest rates will remain low for a considerable time but the market was under the impression a “considerable” would be longer than 6months after the end of QE. Speeches from Fed members throughout the month will carry more weight as investors attempt to get a handle on the Fed’s more hawkish stance. Yellen may not have meant to give the market a timeline to look towards, either way, much more dovish talk is needed to distract the market’s attention from spring 2015.

Though the dollar is now in a more favourable position, much more impressive data is needed to keep the momentum going. Non-farm payroll figures will be published on Friday and as usual the market will penalise the greenback for any figures below consensus. We believe at least a decent reading will spur greater demand for the greenback, especially if other economic figures ahead of the release also prove to be positive. Provided the employment report is encouraging, we could see the downward trend in EUR/USD and GBP/USD really begin to take hold this month.

GBP/EUR- 1.2160
GBP/USD- 1.6500
EUR/USD- 1.3700

Sasha Nugent
Currency Analyst
Caxton FX 

Caxton FX Weekly Report: Will a lower inflation reading be enough to trigger a move from the ECB?

Retail sales gives sterling a boost, but will PMI figures keep the momentum
going?

Last week retail sales data gave sterling the boost needed to keep the currency competitive, especially against the euro. This week, a slew of UK figures should help the pound remain on the front foot, especially if PMI data continues to suggest growth in the manufacturing, construction and service sectors remained strong. The manufacturing and construction numbers will be of particular interest as the economy continues its efforts to shift away from its dependence on the service sector. Another drop in Eurozone inflation may give sterling a helping hand as the market builds its expectations of a response from the ECB. Things will be more challenging against the greenback as the all important nonfarm payroll figure is due this Friday and is expected to provide the dollar with some momentum. This coupled with some more hawkish language from Fed Chair Yellen could give the greenback the upper hand against sterling.

Asian buyers support the euro despite the drop in Eurozone inflation
This morning Eurozone inflation figures have showed price pressures continued to ease resulting in the y/y reading dropping to 0.5%. The ECB will announce their interest rate decision on Thursday and after this below expected figure, it will be interesting to see if this has had any effect on their stance. We know from the last meeting that the governing council believe inflation will pick up but this number may be a signal that downside risks could be materialising. As a result, pressure on the ECB to act is building, but we doubt the central bank will take action just yet. Despite the unexpected weakening in price pressures, the euro has been fairly resilient thanks to the support of Asian buyers.
Other figures published throughout the week such as Service PMI figures could offer the single currency further support. Upside surprise in unemployment data will be welcomed but on the whole we expect the single currency to be more vulnerable this week.

Dollar still fighting for strength but things could change this week
For weeks the dollar has been penalised for inconsistent data as the market struggles to really get a handle on the economic situation in the US. Some more hawkish comments from Janet Yellen has helped the greenback although an encouraging employment report will definitely help provide the boost the greenback needs. If non-farm payrolls comes in above 200k we could see a shift in sentiment towards the greenback as the prospect of an earlier than expected tightening of policy builds.
There will be more than enough data releases ahead of the employment report to provide the currency with momentum including ISM Manufacturing PMI, Trade Balance and Unemployment Claims. Provided these figures hold up well, there is no reason why we cannot see cable below 1.66 and EURUSD falling below 1.37. UK PMI data will attempt to limit the dollar’s gains but with focus on the US employment report, we feel this reading will take precedence.


End of week forecast

GBP / EUR	1.2120
GBP / USD	1.6600
EUR / USD	1.3690
GBP / AUD	1.8100

Sasha Nugent

Currency Analyst

Caxton FX

What to take from Chancellor Osborne's Statement

This morning Chancellor Osborne delivered his Spring Budget Statement emphasising the improvements being made in the economy whilst also highlighting the need for more work to be done to support exports, investment, manufacturing and savers. The key points are below:

UK Growth

• OBR has now revised growth higher to 2.7% in 2014 from 2.4% in the Autumn statement, and 2.3% next year, 2.6% in 2016 and 2017 
• The OBR estimates the economy will be larger this year than it was in 2008. 
• 24% fall in claimant count in one year 
• OBR predicts earnings will grow faster than inflation this year 

Public Finances

• The deficit will be 6.6% next year, 5.5% and 4.4% in the following years to reach 0.8% by 2018/19 
• Borrowing will be £95bn, £75bn, £44bn and £17bn in the next few years then followed by a surplus - this year’s borrowing will be £108bn 
• Reduced interest payments as a result of lower borrowing costs will save every family £2000 a year 
• Debt will peak at 78% in 2015/2016 before easing to 76.5% in 2017/2018 
• Welfare cap will be £119bn in 2015-16 and will be voted on in parliament. Any breach will need approval from the parliament - state pensions exempt 

Tax

• HMRC’s budget will be raised to tackle tax avoidance 
• 15% stamp duty on corporates buying houses worth £500k - down from £2m 
• Basic tax allowance will rise to £10,500 and higher rate threshold will rise to £41,865 and then another 1% next year 

Exports

• Double lending to £3bn and interest cut for export financing 
• The taxes on private flights will be increased whilst all long haul flight tax rates will be capped 

Investment

• £200m available to repair roads and local authorities will have to bid for this funding 
• £270m for Mersey Gateway Bridge 
• Extend grants to smaller business to widen apprentices programme 
• Annual business investment allowance of £250k to be doubled and extended to 2015 

Manufacturing

• £7bn package to cut British business’ energy costs 
• Compensation worth £1bn to protect manufacturers from green levies 
• Fuel duty rise due in September cancelled 

Savers

• Cash ISAs and stock ISAs combined into one product and transfers from shares into cash will be allowed 
• ISA limit will rise to £15k 
• Issuance of pensioner bonds and a maximum of £10k can be saved in each bond 
• 10% savings tax rate will be removed 
• Compulsory annuity purchases will be abolished

Caxton FX

Caxton FX Weekly Report: Chancellor's Budget to offer sterling a helping hand

Sterling prepares for a comeback

After weakening at the mercy of buoyant euro, the pound may be preparing to reverse recent losses in the week ahead. Not only is there a busier calendar with labour market figures being published, but the chancellor is also due to present the latest Budget. With the market expecting some upward revisions to the GDP forecast as well as another improvement in public finances, we could see some sterling strengthening on the back of this. The minutes from the last Monetary Policy Committee meeting will also be released and once again the market will be paying attention to the views of the members in order to gauge the likely timing of policy tightening. The Inflation Report Hearing last week revealed some division in the committee about how much spare capacity there actually is in the economy. The MPC judged that spare capacity is likely to range within 1-1.5% and whilst Governor Carney personally felt slack was at the upper end of the range, other members such as Martin Weale felt that spare capacity was something under 1%. It will be interesting to see whether this difference of opinion was reflected in the minutes, and this will most likely cause some volatility. BoE Governor Carney will speak tomorrow afternoon, so we also expect some movement on the back of this.

Euro takes a back seat after a week of strength

Despite some key economic figures due for release in the Eurozone this week, we doubt the performance seen last week can continue in the days ahead. Having said that, reserve managers are still supporting the single currency and as long as the ECB refrain from talking the currency down, we expect the currency to remain fairly robust. What is even more interesting is the fact that remarks from ECB President Draghi outlining the effect euro strength is having on the exchange rate has failed to grab the market. Draghi stated that a 10% trade weighted appreciation of the euro has typically reduced inflation by roughly 40 to 50 basis points, and also claimed that the currency’s strength was “becoming increasingly relevant in assessment of price stability”. This suggests the central bank may become more vocal in their need for a weaker currency if the euro continues to strengthen. The eurozone inflation figures released this morning showed inflation remains at 0.7% y/y and this suggests the euro will be under a bit of pressure this week. Other figures such as German ZEW Economic Sentiment should offer the currency support, however we expect other major events such as the Chancellor’s budget and the Fed meeting to take precedence.

Another $10bn reduction is on the cards from the Fed
The last employment report has provided the market with confidence that the Fed may not have to freeze its wind down of asset purchases when they meet this week. US retail sales and unemployment claims figures supported the greenback last week and there are number of releases due ahead of the Fed meeting which could encourage this further, including building permits and inflation figures. In her first vote on monetary policy as Chair, we expect the FOMC to keep interest rates unchanged and taper asset purchases further by another $10bn when they meet on Wednesday.

Crimea voted overwhelming in favour of joining Russia over the weekend, but the US and EU continue to condemn the vote. For now markets are relatively calm as they wait for further developments, but with the US and EU threatening sanctions could be implemented as soon as Monday, tensions could escalate very quickly in the days ahead. As a result, the greenback could benefit from its safe haven status as the market shifts further away from riskier assets. Taking into account the potential support for the pound, we expect lower levels in cable will be much more difficult to achieve. Weakness in EUR/USD is more likely, especially after inflation data showed CPI at 0.7% y/y.

End of week forecast

GBP / EUR	1.2040
GBP / USD	1.6600
EUR / USD	1.3800
GBP / AUD	1.8450

Sasha Nugent

Currency Analyst

Caxton FX 

Caxton FX Weekly Report: Dollar in favour ahead of Fed meeting

Sterling loses its grip
As expected the pound experienced some weakness against the euro as the ECB held off from easing policy further, and PMI data failed to provide any upside surprise worthy of any significant strengthening. The week ahead presents a light calendar for sterling, which means there is a window open for the US dollar and euro to gain on the back of some strong figures. The main release for the week will be manufacturing production data, which will need to impress in order to keep the pound competitive and prevent any further downside in GBP/EUR. The Monetary Policy committee will appear before the Parliament’s Treasury Committee on Tuesday to discuss the BoE’s latest inflation report. We may see some movement on the back of remarks from Governor Carney, however, we doubt the hearing will have a significant effect on sterling strength.

The euro begins the week in charge
The euro begins the week on the front foot especially after the ECB held rates last week. Their projection into 2016 suggests that, despite inflation remaining below their 2% target, medium to long term inflation expectations are still well anchored. There was also some optimism about growth in the euro area, which provided the currency with some momentum. With the ECB unlikely to take action anytime soon, the euro should be well supported for the next few weeks.

In the days ahead, there are a few opportunities which could help the euro advance further, such as industrial production figures and trade balance data. We expect the light UK calendar will leave the window open for lower levels in GBP/EUR, however, we predict it may be slightly more challenging for the single currency
to drive the EUR/USD rate higher.

Non-farm payrolls provide the dollar with some relief
A slew of US data will be published in the next few days and this has set up the greenback for opportunities to strengthen. The dollar has been particularly vulnerable against the euro as EUR/USD breached 1.39 in the last session. US nonfarm payrolls provided the dollar with a little relief as the figure beat expectations adding 175k workers, preventing a third consecutive poor figure. This has eased pressure on the FOMC which may have been forced to put their tapering plan on pause if the employment report disappointed. The Fed is due to meet next week and for now it looks that the Fed could reduce asset purchases by another $10bn.

Retail sales data released on Thursday will be key, especially after the last reading showed a decline of 0.4% m/m. The market is expecting a rise of 0.3% m/m and any upside surprise will be welcomed considering the weakness we saw last week. Some solid numbers should allow the greenback to get a better handle on the
euro, however, with the amount of investors willing to support the single currency, we expect the dollar will be penalised for any poor results.

End of week forecast

GBP / EUR	1.2010
GBP / USD	1.6600
EUR / USD	1.3840
GBP / AUD	1.8350

Sasha Nugent

Currency Analyst

Caxton FX

March 2014 Currency Report: Eurozone inflation eases pressure on ECB

Sterling has remained in favour over the last month although it has lost a little ground. GBP/EUR is still trading above 1.21 whilst levels in cable remain elevated above the 1.67 mark. The BoE Inflation Report was released and the upward revisions in UK growth triggered aggressive sterling buying as optimism about the prospect of a rate hike increased. This month developments in the UK economic climate will be watched
closely especially considering recent concern that growth is slowing.

It is the same story again this month with focus primarily on eurozone inflation and the next move from the ECB. Data last month was not particularly impressive, but GDP figures at least pointed towards a slightly brighter outlook for the euro area. There is still talk circulating about the possibility of negative positive rates and this will be a key discussion ahead of the policy announcement.

The Fed tapering debate continues to be at the forefront of things and now the discussion is surrounding whether the Fed will continue to pull back purchases at the pace of $10bn a month or pick up speed. Economic figures from the US haven’t been particularly impressive over the last month especially the last two payroll readings; another disappointing number this Friday could result in some severe dollar selling.

Pound still in favour, but for how long

Demand for sterling hasn’t faded just yet and some of this is due to orders in relation to the Verizon and Vodafone merger. Other factors underpinning the pounds resilience is the on-going speculation regarding the path of UK interest rates. Although the central bank have consistently reinforced the fact that rates will remain low for a while yet, expectations that policy could tighten in the first half of 2015 have kept the currency competitive. Forward guidance is now based on broader measures with the focus of the MPC on reducing slack and increasing productivity. Comments from monetary policy committee members such as BoE member Weale have encouraged speculation by claiming the bank rate could rise even sooner if wage growth rises more quickly. The revised UK GDP figure confirmed the initial reading of 0.7% q/q growth but what was particularly encouraging was the contribution from business investment and exports. The BoE have highlighted the need for a pickup in business investment to help spur productivity growth, and this figure suggests that the recovery is broadening. As a result we expect sterling bulls will be comforted by this. The pounds performance this month will be partly dependent on whether data releases can keep the optimism brewing. Recently there has been some concern that growth in the UK is slowing and although the second GDP estimate was in line with expectations, PMI data this week will need to impress in order to keep demand for sterling strong. Wage growth in particular will be scrutinized considering the implications this has for monetary policy.

GBP/EUR

Will the ECB act?

Eurozone inflation data was released last week and this has resulted in some repositioning in both the GBPEUR and EUR/ USD rate. A lot of the reasoning behind the euro’s vulnerability has been the uncertainty behind what is to come next from the ECB. Recent data has not been disastrous as GDP data showed the French economy finally returned to growth in the fourth quarter. PMI figures on the other hand were not as positive but what cannot be denied is the progress being made by the euro area.

The reading of 0.8% y/y inflation can be considered a relief if we take into account the potential effect of a dip lower to 0.6%y/y. This would have definitely increased the pressure on the ECB to act. At least for now, the central bank has more room to assess the medium to long term outlook for inflation before deploying their monetary tools. There is still a lack of clarity about what tools in particular the ECB will choose when and if the time comes to act against deflation. Talks of negative deposit rates resurfaced last month and only temporarily weakened the euro. This highlights the uncertainty surrounding the issue and we expect the market to listen out for further clues as to what weapon is the central bank’s first choice.

GBP/USD

Third time lucky?
The past two US nonfarm payroll readings have been disappointing, and adverse weather has been blamed for the poor results. It was hard enough to get the market to swallow that reasoning after the last figure was released, but another weather excuse for this month’s reading won’t wash too well with investors. Other economic figures haven’t been particularly impressive either, as some were also affected by the climate. This month the market needs to see some solid numbers, especially if the Fed is to continue to withdraw their asset purchases.

Fed Chair Janet Yellen testified before the Senate Banking Committee last week and this gave the dollar some support. Taking into account Yellen is considered a dove, her remarks regarding the direction for monetary policy suggested that the recent developments will not result in a halt in the Fed’s tapering plan. The key focus for the market this month will be the decision by the FOMC when they meet mid month. The
statement will provide further clues about the committee’s current stance and attitude toward the pace of tapering. We expect the FOMC to continue reducing purchases by $10bn for now.

GBP/EUR- 1.2170

GBP/USD- 1.66

EUR/USD- 1.37

Sasha Nugent

Currency Analyst

Caxton FX

Caxton FX Weekly Report: Another poor employment report could hurt the US dollar

Can sterling remain in favour?

For yet another week sterling has remained fairly robust, although Eurozone inflation data encouraged some lower levels in GBP/EUR. In the days ahead, opportunity to pare back losses and we expect levels in cable remain elevated as the pound capitalises on weak US data. PMI data is back in focus and after the last round of slightly below expected figures, solid numbers here should keep the pound in demand. What will be key is to see growth in both the manufacturing and construction sectors continue to suggest the economy is gradually rebalancing. The BoE will meet again and announce their interest rate decision which we suspect will not result in much market movement. The outlook for the UK remains positive and as long as UK data continues to display this picture, it is more than likely that sterling buyers will continue to encourage a stronger pound.

ECB to remain on hold after eurozone data
The euro has started this week on a high, and it is unlikely that the ECB will pull the rug just yet. Eurozone inflation rose 0.8% y/y easing the pressure off the ECB and dampening expectations that the central bank will take action at their meeting later on this week. An above expected number hasn’t exactly removed the concern just yet. The reading was only a flash estimate which means there is always room for a downward revision. One thing that seems to be clear is there’s not sufficient evidence to warrant a change in policy from the ECB, and this should keep the euro well supported. Other figures such as retail sales, services PMI data and German factory orders could also support the single currency, although it will be difficult for the euro to advance further against sterling. With the dollar on the back foot and plenty of event risk ahead, disappointing US data could fuel a move further through 1.38 this week.

Third time lucky?
US non-farm payrolls is one of the most influential data releases and after two readings below estimates, this particular reading will be scrutinised. Although remarks from Janet Yellen last week suggest that softer data may not necessarily warrant a pause in tapering, a poor release on Friday may actually change the view of Chair Yellen. Ahead of the release a number of US figures will be watched carefully, as a number of data releases over the past month were affected by adverse weather conditions. Some more positive releases this week should see the greenback in better form, especially if payrolls provide some upside surprise.

The greenback may also receive a lift on the back of tensions in Ukraine. Russia has deployed military forces into Ukraine and they have now taken over army bases in Crimea. As the situation escalates and the West urge the Russian President Putin to withdraw troops, investors move towards safe havens currencies as the prospect of war increases. This should provide the greenback with a little more support, although the extra momentum will not limit the downside if the employment report disappoints.

End of week forecast

GBP / EUR	1.2170
GBP / USD	1.6650
EUR / USD	1.3740
GBP / AUD	1.87

Sasha Nugent

Currency Analyst
Caxton FX

Caxton FX Weekly Report: GDP data takes centre stage

Sterling stands firm

Although sterling strength has eased slightly in the past week, there is still plenty of demand for the currency. Even disappointing retail sales figures weren’t enough to really get the downward trend in GBP/USD and GBP/EUR going. In the days ahead there will be much less event risk, which leaves the window open for some lower levels in both these rates. The key release will be the second GDP estimate which is expected to be in line with the preliminary estimate at 0.7%q/q growth. Other economic figures such as CBI realised sales and BBA mortgage approvals should provide the pound with some support ahead of the GDP reading.

BoE Governor Carney will speak later on in the week and with the likelihood of interest rate increases underpinning the currency’s strength, sterling bulls will be watching carefully for any hawkish talk. Considering the momentum we’ve seen over the past couple of weeks we expect the pound will be fairly supported, but a light calendar leaves the currency subject to some weakness.

Time for eurozone inflation once again

Focus will shift towards the Eurozone this week as the flash CPI figure will be released, bringing the next move from the ECB into focus. Eurozone data hasn’t been too disappointing lately disregarding the not so impressive PMI figures. Nevertheless, there was nothing significant to suggest the ECB need to act at their next meeting, and we know from numerous speeches that downside risks need to materialise in order for the ECB to act. A lower than expected number will mostly likely cause some severe weakening in the single currency, especially against sterling.

Other Eurozone figures such as German unemployment change and German retail sales could also offer the currency some support. US data has been disappointing over the past week and some solid figures here could trigger some more euro buying ahead of the inflation release on Friday.

What does US GDP have in store?

In the past few weeks there have been some concerns about US growth, especially considering poor data, in particular the non-farm payroll release at the beginning of the month. Levels in cable remain elevated and US data due this week needs to impress in order to get the downward trend going. The key release will be the GDP reading and growth is expected to slow to 2.6% q/q from 3.2% previously. Adverse weather conditions have had an effect on data recently and we expect some of this will be reflected into the reading. The sharp drop in retail sales also support the likelihood that growth was much softer towards the end of last year and possibly the beginning of this year also.

Any upside surprise in this figure will most likely trigger some dollar buying. The Fed is yet to signal any move away from their current plan to continue tapering and for now this is keeping the dollar afloat. It will be a difficult week ahead for the currency and with the greenback on the back foot, we doubt investors will hesitate to weaken the dollar further on the back of some poor results.

End of week forecast

GBP / EUR	1.2060
GBP / USD	1.6620
EUR / USD	1.3770
GBP / AUD	1.8480

Sasha Nugent

Currency Analyst

Caxton FX

A confidence booster for the BoE

After the last flagship forward guidance from the BoE undermined the credibility of forecasts and expectations, things seem to be getting off to a better start for the central bank. For the first time since November 2009, inflation has dropped marginally below the inflation target to 1.9%, further justifying the need to keep interest rate at current levels.

In the quarterly Inflation Report released last week, the bank predicted inflation would fall below the 2% target and expect lower levels to remain for a while to come. A combination of lower inflation and a decent recovery creates an environment which will allow the BoE to continue to maintain their accommodative stance, and further support the recovery.

There is also a hope that as the recovery gathers momentum, lower price pressures will reflect into rising real wages as pay increases outpace inflation, therefore restoring purchasing power. The next key release will be tomorrow’s unemployment figures and although a drop in unemployment would be positive, the focus will be on wage growth.

For now BoE forward guidance remains credible, however with the market still set on a rate increase in 2015, investors may need a little more convincing that interest rates will remain low for a while yet.

Sasha Nugent

Currency Analyst

Caxton FX

Caxton FX Weekly Report: Sterling keeps the pressure on

Sterling soars
It seems that nothing can stop demand for sterling now. The BoE’s adjustment to forward guidance went down well with the market and fuelled significant strengthening of the pound. Although the central bank ruled out any immediate tightening, confidence about the UK outlook and the prospect for a policy tightening in the first half on 2015 is strong. This week there is an opportunity for the pound to advance further as unemployment data could help the pound rebound after inflation came in below estimates. Some more encouraging numbers here will most likely keep the dollar and the euro on the back foot for yet another week.

The latest MPC minutes will be published, and it is unlikely that this will encourage any significant sterling buying. In the last monetary policy meeting the committee opted to maintain the current level of asset purchases and hold the bank rate at 0.50%. Considering the Inflation Report was released just last week, we doubt rhetoric in the minutes will differ much and therefore expect minimal movement on the back of that release.

PMI attempts to rescue the euro 

Despite some solid GDP figures last week, the euro is still struggling against sterling, and has failed to really push the EUR/USD rate further through 1.37. Growth across the region has boosted hopes that the worst of the regions crisis is behind it and this has made the outlook for the eurozone a little brighter. This week Eurozone PMI data will be key and some impressive results should contribute to more a positive view, and therefore be reflected into euro strength.

Last week talks of negative deposit rates in the Eurozone resurfaced as ECB member Coeure implied the ECB had seriously been discussing this option. Although the effect on the euro was temporary the market is still unsure about what is to come from the ECB, which could keep the euro vulnerable.

An important week ahead for the dollar

The greenback has taken a huge hit, especially against the pound as US data continues to disappoint giving investors more excuses to favour sterling. Comments from Fed chair Yellen were regarded as dovish and this has also weighed on the dollar’s performance. A buoyant pound has pushed cable towards three year highs and with sterling buyers waiting in the wings, US figures this week will need to impress to ease pressure off the dollar.

The Federal Open Market Committee (FOMC) will release the minutes from their last monetary policy meeting. Considering remarks made by Fed Chair Yellen, the market will be looking closely for any sign of a dovish bias from the central bank. Since their last decision to reduce asset purchases further by $10bn, yet another disappointing employment report has been released. Although this is unlikely to have a significant impact on their stance, it has provoked some concern about the labour market and an upbeat tone is needed in order to provide the greenback with some support. Pressure on the dollar has eased slightly, however with plenty of event risk ahead, it may not be long before the dollar is penalised for more disappointing figures.

End of week forecast

GBP / EUR	1.2150
GBP / USD	1.6675
EUR / USD	1.3675
GBP / AUD	1.8550

Sasha Nugent

Currency Analyst

Caxton FX

Dollar performance may be limited if UK growth continues to surpass expectations

It wasn’t so long ago when the Fed signalled a wind down in asset purchases was on the horizon, and the BoE could only hope to shift towards more normal monetary policy. How times have changed, and although the Fed has managed to begin tapering, the delay and minimal monthly reduction has resulted in a reduced effect on the GBPUSD rate.

The UK made a surprisingly strong recovery in the second half of last year, and in particular the improvement in the labour market has spurred speculation about when the BoE will bite the gun and raise interest rates. Both economies are on the right track, however the last two non-farm payrolls figures have been disappointing and raised questions about whether the Fed could continue to cut back purchases by $10bn every month.

In her first testimony to the House Financial Services Committee, Fed Chair Janet Yellen acknowledged the development being made in the US economy, but also highlighted that there was still more work to be done and it is important to consider more than just the unemployment rate when “evaluating the condition of the US labour market". In the latest BoE Inflation Report, Governor Carney expressed a similar viewpoint, and despite raising growth forecasts, emphasized that the amount of slack in the economy is a big issue and other broader indicators will be needed to evaluate the economy’s progress. Forward guidance from both the Fed and BoE has indicated that rates will be held constant even after the unemployment thresholds have been breached.

The key difference in policy which may alter the performance of cable (GBPUSD) over the coming year will be the Fed’s decision to taper and hold rates vs the BoE’s decision to raise rates before cutting back on asset purchases. Initially, tapering was expected to have a larger effect on the strength of the dollar as the market viewed it as a tightening of policy. Ever since the UK economy picked up, and forward guidance created a benchmark to gauge the likelihood of rate hikes, the interest rate hawks have been fuelling a stronger pound. The prospect of a rate increase may be far more tempting than continued tapering, especially at a pace of $10bn per month. Although both central banks are trying to convince the markets that policy will remain accommodative, the Fed seems to have succeeded, whilst BoE has failed so far. The fact that the BoE’s initial projections for unemployment were badly timed has had a large effect on the credibility of its forecasts. This has allowed the market to go with its own estimates and continue to price in a rate increase in Q2 2015.

As long as UK growth continues to outperform, the possibility of a rate hike will increase limiting the dollar's potential. Disappointing US data will hurt the greenback, and with the market regarding Yellen as a dove, we doubt investors will hesitate to weaken the dollar further.

Sasha Nugent

Currency Analyst

Caxton FX

Governor Carney fails to convince the market

Today the Bank of England published its latest Inflation Report which was perceived to be broadly positive as the central bank raised its forecasts for UK growth. In his opening remarks, the Governor said the recovery is not yet sustainable and outlined in forward guidance that the central bank will not raise interest rates until more spare capacity has been absorbed. Other broader measures will also be looked at when considering whether to tighten policy, including the unemployment rate. There was also emphasis on the lack of business investment growth and even when the bank does raise interest rates, the process was described to be limited and gradual as the economy still faces a number of headwinds.

Although the Inflation Report does not lay out a timeline for when interest rates will rise, the market has taken the bullish growth projections as a signal that tightening in Q2 2015 is likely. Lack of productivity has been a key issue for the central bank and they have become even more pessimistic about the outlook. Taking this in account, it is surprising that this hasn’t pushed back market expectations of monetary policy tightening.

Considering the fact that the unemployment rate dropped significantly faster than the BoE predicted, it is no surprise that the market is drawing its own conclusions. Until the central bank is successful in reiterating their commitment to low interest rates, sterling bulls will keep demand for the pound strong.

Sasha Nugent

Currency Analyst

Caxton FX

Caxton FX Weekly Report: All eyes on the BoE

It’s time for the Inflation Report

After taking a slight hit last week, there may be more weakness to come for sterling as the BoE will release their inflation Report. After the unemployment rate unexpectedly dropped to 7.1%, the market has been speculating where forward guidance will go from here. Some analysts believe the central bank will lower the unemployment threshold further. In a speech a few weeks ago BoE Governor Carney said forward guidance will no longer focus solely in unemployment, but rather a broad range of factors. The central bank is also expected to raise its growth forecasts once again, and more importantly we expect Governor Carney to reiterate the fact that there is no need at present to raise interest rate anytime soon.

Any dovish language from the central bank will weigh heavily on the pound. Slack in the economy remains and we expect the Governor will draw some attention to this. With the lack of UK data and the BoE likely to dampen any rate hike expectations, it will be a difficult week ahead for the pound.

Eurozone GDP steps up

In the ECB press conference the central bank claimed they need more information in order to assess the likely path of inflation going forward. This week’s main release will be GDP figures which will provide the central bank with a better indication of where growth is for the Eurozone. The decision to hold off for a month allows the ECB to compile its latest macro-economic projections and for the first time, officials will be looking two years ahead, providing growth and inflation estimates for 2016. The ECB have been investigating a range of policy options, and these projections as well as GDP figures will be crucial when the central bank decide what policy tool is appropriate, as well as and whether or not to take any course of action.

President Draghi will speak on Wednesday ahead of the GDP release and the market will keep their ears peeled in case of any dovish talk. Strong GDP numbers will be key for the euro’s performance this week and could potentially push through support levels driving the GBP/EUR rate below 1.20.

A calmer week ahead for the US dollar

Last week was filled with volatility as investors tried to position on the back of the US non-farm payroll figure. Things are a little more settled for the dollar this week and the main release will be retail sales. The last employment report has displayed a confusing picture as non-farm payrolls were below estimates whilst
unemployment beat expectations. With the dollar in an uncomfortable position as investors struggle to make sense of the employment report, solid numbers should offer the greenback some support.

 The dollar may also benefit at the expense of sterling and the euro. Dovish rhetoric from the BoE could weaken the pound and with dollar buyers waiting in the wings, we expect the greenback to capitalise. Similarly, following the ECB press conference last week, attention is now on Eurozone GDP data. If these numbers disappoint, it would be an excuse for the dollar to drive EURUSD downwards. Fed Chair Janet
Yellen will testify on the Semi-annual Monetary Policy Report before the House Financial Services Committee and the Senate Banking Committee and this could also cause some volatility.

End of week forecast

GBP / EUR	1.1970
GBP / USD	1.6340
EUR / USD	1.3600
GBP / AUD	1.8200

Sasha Nugent

Currency Analyst

Caxton FX

February 2014 Currency Report: Where will the BoE’s forward guidance lead us?

The pound dominated trading last month and economic figures continued to support the brighter outlook for the UK economy. This may all change this month as the BoE release their Inflation Report and express worries about sterling’s recent strength. We may also see investors begin to profit take as the market questions the pound’s recent performance.

We have got a little closer to identifying what may be in store from the ECB. At the WEF in Davos, ECB President Draghi reinforced his view that deflation is not on the horizon for the euro area, and also claimed the central bank stand ready to fight against such pressures. This should keep the euro fairly supported although tighter conditions in the money markets will keep the pressure on.

After beginning their tapering programme in December, the Fed decided to reduce asset purchases further by another $10bn. Ben Bernanke definitely seems to have gotten the ball rolling with regards to withdrawing stimulus, but whether his successor Janet Yellen will keep this up is the question. Janet Yellen is regarded as a dove, and this may be reflected in her views of the economy going forward.


The BoE lines up more talk to weaken the pound

In recent weeks, BoE Governor Carney has displayed some concern about the strength of the pound. Most of sterling’s momentum is due to economic figures which have displayed a much healthier economy. The latest unemployment figure showed the jobless rate fell to 7.1% (the lowest level since the first quarter of 2009) and this has brought in to question where forward guidance will head now. In their last monetary policy meeting minutes the central bank saw no need to raise interest rates just yet, and this suggests that the bank are in no rush to tighten monetary policy even after the 7% threshold has been breached. At the WEF in Davos the Governor said that forward guidance will no longer be linked to just the unemployment rate, but rather a range of factors that reflect the overall state of the economy.

The latest GDP reading showed that the economy grew by 1.9% in 2013, the strongest level since 2007. Although this is an encouraging number, the latest labour market figures revealed that total hours worked grew by 1.1% meaning that output per working has fallen. These numbers highlight the issue with slack and productivity and it is likely we will see more focus on this in the weeks ahead.

GBP/EUR

A little insight into what may be in store from President Draghi.

Eurozone figures have shown some improvement over the last few weeks, especially PMI data which the market responded to well. Ireland has made a smooth exit from its bailout plan whilst Portugal looks on track to do the same. Despite some optimism brewing in the Eurozone, sterling still remains firmly in
control of the GBP/EUR as global deflation is a main concern especially in the Eurozone. At the WEF, ECB President Draghi explained that he does not see deflation in the Eurozone but rather a prolonged period
of low inflation. This language is similar to what we have heard from the central bank in the past few months but the surprise drop in inflation back to 0.7% y/y has kept the pressure on the ECB. More importantly,
Draghi explained that quantitative easing – an option adopted by both the Fed and BoE- was not on the table as the European Union treaty “prohibits monetary financing”. In order to combat the lack of lending in the euro area, Draghi said he favoured another approach which involved the ECB buying packaged loans.

The ECB will meet this week and announce their interest rates decision. Considering the bank’s views regarding inflation expectations and price stability, it is unlikely that we will see any change in policy. With regards to inflation, focus remains firmly on price stability and it is clear that downside risks need to materialise in order to see further easing from the ECB. Nevertheless, the market will be watching closely for any change in rhetoric from the central bank.

GBPUSD

Another taper from the Fed, and dollar momentum gets underway

In Ben Bernanke’s last FOMC meeting another $10bn of stimulus was removed from the asset purchase program thanks to a unanimous vote. A further reduction in stimulus has negative effects for emerging markets, yet no attention was drawn to the recent chaos which resulted in a number of central banks having to raise interest rates. The decision also suggests that the central bank is optimistic about growth and is not fazed by the last employment report. This result was widely expected and after months
of sterling directing the rate higher, we may be seeing the beginning of a downward trend in this pairing.

The last nonfarm payroll figure came in well below estimates, whilst the unemployment rate dropped from 7.0% to 6.7%. On the surface, the jobless rate may seem encouraging, but the fall was due to a reduction in the labour participation rate which declined to 62.8%, the lowest level since 1978. This is a medium-to-long term concern which could dampen the view of the labour market. Friday’s release will be just as important as the last, and two consecutive poor readings will bring the Fed’s decision to taper into question.

We expect the pound will weaken in the course of this month as remarks from the BoE weigh on the currency. This leaves the ball in the dollar’s court, and as long as the economic data supports an improving
economy, the downward trend in GBP/USD should continue.

GBP/EUR- 1.2150
GBP/USD- 1.62
EUR/USD- 1.3380

Sasha Nugent
Currency Analyst
Caxton FX

Caxton FX Weekly Report: The market focuses on the ECB

PMI data encourages more sterling buying

Sterling strength has held on, and a light calendar hasn’t stopped investors favouring the pound. Despite manufacturing PMI reading coming in below estimates, PMI data released in the coming days should provide the pound with support, especially if figures surprise on the upside. The BoE will announce their interest rate decision this week and considering recent comments from MPC members, we doubt there will be any change to policy. The market’s focus is now on the Inflation Report which will most likely see MPC members adjust forward guidance to focus on broader measures. As long as economic figures support a brighter outlook, demand for sterling will remain. The market is not yet convinced the central bank will maintain low interest rates and as long as there is a sense of optimism, speculation regarding the likely timing of tightening will continue to keep sterling on the front foot.

Inflation falls back to 0.7%, what will the ECB do?

In a number of speeches, ECB members have said they do not see the Eurozone entering deflationary territory. The markets however disagree, and some investors feel the ECB will need to act soon in order to prevent deflation. The last Eurozone inflation figure showed inflation eased back to 0.7% y/y and this has kept the pressure on the ECB. Some investors are speculating that the central bank will take action as soon as this week when the committee meet to discuss monetary policy. President Draghi has repeatedly said the ECB will be prepared to fight deflation and in the press conference this week we could hear more about the tools the bank favours, if and when they choose to deploy them. At the WEF in Davos, Draghi hinted the bank could buy packages of bank loans to households and companies.
This week Eurozone PMI data will be released but it is unlikely these figures will do much to bolster the single currency. The market is still willing to buy pounds and the dollar is also favoured over the euro leaving more room on the upside for GBP/EUR and downside for EUR/USD.

It is the non-farm payrolls time again

The Fed’s decision to taper assets purchases has brought the dollar back in control against many of its counterparts. However, the outcome of Friday’s employment report may bring the greenback’s recent strength to a halt. The last employment report disappointed, but the Fed shrugged this figure off when deciding to reduce QE further by another $10bn. Friday’s reading will need to come in line with estimates if demand for the dollar is to continue. The participation rate will also be important considering its recent decline.
There are a number of economic figures that will be released in the run up to the announcement and provided the readings are solid we could see demand for the dollar build ahead of the employment report. ISM Manufacturing PMI, factory orders, ADP Non-Farm Employment Change will all be published and this should offer the dollar some support in the days ahead. We expect the dollar to extend gains this week against both the euro and sterling.

End of week forecast

GBP / EUR	1.2175
GBP / USD	1.6300
EUR / USD	1.3420
GBP / AUD	1.8600

Sasha Nugent

Currency Analyst

Caxton FX

You can’t keep the pound that easily

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

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

Sasha Nugent

Currency Analsyt

Caxton FX

Caxton FX Weekly Report: Sterling strength eases

Sterling takes a breather after an eventful week

After what has been a volatile week for sterling, the days ahead look a little calmer for the currency. UK unemployment data has given the pound a lot of support, despite the fact that the BoE are still a way of from raising interest rates. BoE Governor Carney claimed that the recovery is still not strong enough to warrant a
tightening of policy, and also expressed some concern regarding a stronger pound. These dovish statements will continue to weigh on the pound, at least until the next Inflation Report sheds light on where monetary policy is heading. The Governor is due to speak on Wednesday afternoon and if the language is similar to what we heard last week, sterling will be on the back foot against both the euro and the dollar. The UK preliminary GDP reading will be published on Tuesday and any upside surprise here should limit potential losses for the pound.

The ECB are prepared to fight deflation

Concern about global deflation is building, and after the ECB cut interest rates to combat deflationary pressures, the market has been worried about whether the deflation is on the horizon for the euro area. On the panel at the WEF in Davos last week, ECB President Draghi explained that he doesn’t see deflation in the eurozone. Draghi also signalled that the central bank is prepared to fight deflation by using means other than quantitative easing- an option both the Fed and BoE have adopted. The Governor suggested the bank may opt to buy packages of bank loans to houses and companies if economic conditions worsen.

With inflation at the forefront of the regions problems, CPI figures released on Friday will be a focal point. Another decent rise in price pressures will support Governor Draghi’s claim that the eurozone is not heading for deflation, but is rather experiencing a prolonged period of low inflation. Upside surprise here will be
welcomed and will most likely provided the euro with the boost needed to sustain levels beyond 1.37 in EUR/USD. Sterling will be on the back foot, and any upside surprise here could see levels below 1.20 return temporarily.

Will we see another reduction in stimulus from the Fed?

The Federal Open Market Committee will meet this week to decide whether to reduce stimulus further from the current $75bn per month. Despite the last payroll figure coming in short of estimates, the market hasn’t ruled out the prospect of another reduction from the Fed and this should bolster the dollar. Ben Bernanke 

comes to the end of his term as Fed chairman this week, leaving Janet Yellen to take up the post in February. 

A slew of economic figures will also be released, including CB consumer confidence, advance GDP, pending home sales and unemployment claims. Provided these figures produce some decent results we could see the dollar regain support and drive both the GBP/USD and EUR/USD rate lower. The greenback has managed to prevent the euro from maintaining levels above 1.37, but if the Fed maintain their current asset purchase program, and data disappoints, the euro could have the opportunity needed to sustain levels above 1.37.

End of week forecast

GBP / EUR	1.2010
GBP / USD	1.6480
EUR / USD	1.3600
GBP / AUD	1.9070

Sasha Nugent

Currency Analsyt

Caxton FX

Caxton FX Weekly Report: Sterling takes control of the GBP/EUR and GBP/USD rates

Unemployment data set to keep the pound in charge

Sterling begins the week in a good position after UK retail sales allowed the pound to recover some losses incurred earlier on in the week. We may see the strength continue as spotlight hits unemployment data due on Wednesday. The UK labour market has continued to show improvement, and a report confirming an increase in city hiring, further supports the brighter picture. The Bank of England have already acknowledged the progress made in the unemployment rate, and any upside surprise here will bring the 7% unemployment target closer. The potential implications this has on future monetary policy should encourage a firmer pound, despite weaker inflationary pressures. The BoE monetary policy minutes also due to be released this week, should shed light on the central bank’s current stance towards tighter monetary policy. Although the need for higher interest rates has faded, a stronger recovery should create an economic environment that can withstand tighter credit conditions. This should keep the possibility for a rate increase in early 2015 alive. We expect the pound will be able to remain on the front foot against both the euro and dollar this week.

More problems for the ECB

The liquidity situation in the Eurozone is becoming an even bigger issue for the ECB, which has resulted in higher money market interest rates. The ECB are now under even more pressure to act against tightening (short-term) credit conditions. ECB President Mario Draghi has expressed the central bank’s commitment to

act against “unwarranted tightening of the short-term money markets”, and this suggests we may see some more action from the ECB sooner rather than later.

A number of key figures will be released this week including German ZEW Economic Sentiment and PMI data. As usual, the manufacturing and services PMI releases will be a focal point and any indication of an improvement in these sectors will be welcomed. It is unlikely that this will take precedence over UK unemployment figures, however, some strong numbers here could limit the potential upside in the GBP/EUR rate. It is a similar picture against the greenback, and we doubt there is enough momentum behind the euro to encourage significantly higher levels in EUR/USD.

A lighter calendar leaves the greenback open for vulnerability

The dollar has strengthened in these last few sessions, especially against the euro. Upside surprise in US figures have encouraged speculation that further cut backs in asset purchases is on the horizon and this should keep the greenback fairly supported in the days ahead. Lack of economic releases from the US leave
the window open for some weakness, and the main releases this week will be unemployment claims, existing home sales, and flash manufacturing PMI. After the last unemployment claims figure came in unexpectedly strong, another solid figure should increase demand for the dollar. With eurozone PMI figures due to be published earlier that day, any disappointing numbers could get the ball rolling for lower levels in EUR/USD, and good US figures should support the move further.
It has been more difficult for the dollar to advance against sterling, and with expectations that the UK labour market has continued to improve, we doubt the dollar will be able to make any significant gains against sterling this week.

End of week forecast

GBP / EUR	1.2175
GBP / USD	1.6370
EUR / USD	1.3500
GBP / AUD	1.8770

Sasha Nugent

Currency Analyst

Caxton FX