UK Manufacturing Figures come in very strongly, IMF delivers positive news

This morning’s 9:30AM release of UK Manufacturing Production m/m (1.0%) was the highest increase in manufacturing output since November 2013 (1.2%). This shows that the UK economy is churning back to life in the New Year after the winter months and a revival natural-gas production in February has reportedly helped that along. GBP/EUR is up 0.45% on the day, GBP/USD is up 0.84% on the day, and Sterling has rallied against other currencies across the board for a sustained rate rise throughout the day after the figures this morning. This has increased optimism that the UK is poised for a strong GDP figure for the first quarter of the year and brightened the economic outlook.

Also, the IMF predicted today that the UK will have the fastest growth (2.9% y/y) of the leading G7 economies this year. The UK did not have a completely clean bill of health as the IMF accused the UK of an “unbalanced” recovery with greatly expanded mortgage lending and easier credit conditions. However, for the time being, the overall outlook of the UK is very positive, resulting in a strong pound.

Nicholas Ebisch

Corporate Account Manager

Caxton FX

Caxton FX Weekly Report: UK inflation to support BoE's stance on accommodative policy

Will inflation drop further?

Sterling managed to recover ground last week, especially after claimant count continued to fall and the Chancellor’s budget went down well with the market. The pressure is still on with inflation data due for release tomorrow. Price pressures have eased considerably over the past few months and a drop further to 1.7% will support the central bank’s decision to keep interest rates at current lows. On the other hand, any upside surprise in this reading will most probably encourage demand for sterling. Retail sales data will also be released and after the last reading showed a drop in sales by 1.5% m/m, a figure that beats estimates will be welcomed by sterling bulls. Other data including current account figures should also keep the currency well supported although we expect it will be more difficult for sterling to advance against the dollar than the euro.

Eurozone PMI figures to spur more euro buying

Despite weakening against both the pound and greenback, the euro still has a fair amount of support in the markets. This morning’s PMI data for the euro area was released and the results were mixed. Although the French manufacturing reading beat estimates at 51.9, the German number disappointed coming in at 53.8. This has prevented the single currency from sustaining levels above 1.38 in EUR/USD and has also given sterling a helping hand in maintaining levels above 1.19. With Asian buyers keeping the pressure on, other figures such as German Ifo Business Climate could encourage further strengthening against sterling, especially if UK inflation figures come in below estimates. Things will be a lot more difficult against the greenback as the market adjusts to the prospects of tighter policy in the US by spring 2015. Considering the market’s reaction to today’s figures, it seems like investors may begin to penalise the euro for any figures that are below estimates. Despite this renewed demand for the greenback, we suspect some solid eurozone data this week will be able to keep the single currency competitive.

Finally a firmer dollar to kick start the week

Yellen did the dollar a huge favour last week whether she meant to or not. In the press conference after the Fed announcement, the Fed chair implied that we could see policy tightening in the US by spring 2015. Despite this encouraging demand for the greenback, it may not be enough to ensure momentum is maintained. A slew of releases due this week including CB Consumer Confidence, New Home Sales and Durable Goods Orders will be watched carefully, and they would need to provide some upside surprise to really allow the greenback to get a handle on the euro and sterling. Today Flash Manufacturing PMI will be published (13:45), and a decent figure here should allow the greenback to start the week on a solid footing.

A number of FOMC members will speak this week and the market will be paying particular attention to the language used. Any hawkish remarks will most likely encourage more dollar buying helping to ease the pressure from a buoyant euro as well as sterling.

End of week forecast

GBP / EUR	1.20
GBP / USD	1.6400
EUR / USD	1.3710
GBP / AUD	1.8300

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

Where is the Indian Rupee going from here?

The GBPINR rate has been trending upwards, and ever since the Federal Reserve Chairman Ben Bernanke announced the central bank’s intentions to reduce monetary stimulus, the Indian rupee has depreciated significantly.

In general there has been a great concern that many emerging market economies such as India will suffer from capital flight once the Fed decide to gradually return to more normal monetary policy. The decision to reduce asset purchases was considered the first step, and currencies such as the Indian rupee tumbled once the intention was announced last summer. More importantly, the rupee’s depreciation intensified due to its current account deficits and growth fears of the emerging markets as a whole.

India also suffers from very high inflation and this has also undermined the currency. The Reserve Bank of India (RBI) is now considering introducing an inflation target and this will allow the markets to clearly asses RBI’s performance as well as understand what their goals are.

On the UK side of things, the economic recovery has strengthened and economic fundamentals continue to paint a brighter picture for the UK. Inflation has slowed to the central bank’s 2% y/y target and unemployment has also plummeted to 7.1%. The rapid improvement in the outlook for the UK has strengthened the pound, and has also increased market speculation about when the BoE will be ready to raise interest rates. BoE Governor Carney has claimed that the central bank has no plans of raising interest rates any time soon, but as long as economic indicators continue to display and improving economic environment, expectations of a rate increase will remain.

Based on these factors we see expect the upward trend in GBPINR to continue. The rupee is stabilizing, but as the Fed continues to wind down purchases, and the economic situation in the UK improves the only way is up for GBPINR.

Sasha Nugent

Currency Analyst

Caxton FX 

A step into reality

Last week we witnessed a sterling sell off as investors began to pare back expectations of a rate hike earlier than the BoE outlined in forward guidance. Investors came to the reality that although the UK recovery is gaining momentum, there is definitely a long way to go and the road to recovery is going to be a bumpy one. UK manufacturing production figures released this morning showed a 1.2% decline, a figure which was a complete surprise to the market, triggering another sterling sell off. This is unlikely to alter the overall view on the UK economy but will rather inject a burst of practicality into the markets. It was almost impossible for UK data to continue to provide upside surprise and it was only a matter of time before the market adjusted.

Sasha Nugent

Currency Analyst

Caxton FX