EUR, GBP, JPY benefit from dollar weakness

The dollar index has fallen significantly over the course of the week. This bearish attitude toward the Dollar throughout the week was a result of the Wednesday FOMC meeting in which the members of the Federal Reserve board expressed concern about low levels of inflation. This led to speculation that interest rates will remain low for longer. The Pound, Euro and Yen stood to benefit near the end of this week, as alternative safe-haven currencies, and have increased in value in the last 24-hours as investors have shied away from buying the dollar.

The Euro has improved against its major counterparts as a positive ECB monthly bulletin combined with Greece selling over $4 billion worth of bonds to eager investors on Thursday. The high-demand for Greek bonds on Thursday drew attention to how much those markets have recovered since the days of the Eurozone crisis. With these facts fresh in the minds of investors, the Euro has received a recent bump higher, but these gains may be limited as we currently forecast Dollar and Sterling strength in 2014.

Nicholas Ebisch

Corporate Account Manager

Caxton FX

Caxton FX Weekly Report: Fed in Focus

Another week of vulnerability for sterling

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

The euro bulls return

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

All eyes on the Fed meeting

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

End of week forecast

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

Sasha Nugent

Currency Analyst

Caxton FX

Caxton FX Weekly Report: Talks of looser monetary policy from the ECB keep the euro on the back foot

Super Sterling Returns

Despite a light calendar, it was an impressive performance for sterling last week as CBI Industrial Order Expectations smashed estimates and drove both the GBP/EUR and GBP/USD rates higher. Levels remain elevated and there is still a chance there are some bullish sterling investors waiting for the moment to push the rate further. The main release this week will be the second GDP estimate, and any upside surprise here will most likely trigger some more sterling momentum.

On Tuesday, The BoE governor and the monetary policy committee will appear before the Parliament’s Treasury Committee to discuss the central bank’s latest inflation report. This will present an opportunity for the market to move on the MPC’s comments, especially if they reveal more about the future of interest rates. Sterling should be well supported this week but it is unlikely the big moves will come from the British side of things.

Eurozone inflation figures on watch

Last week it was revealed that the ECB monetary policy committee had discussed negative deposit rates. Although President Draghi has managed to calm the markets, it may not take much to get the topic brewing again. The key release will be the eurozone inflation figure which is expected to rise to 0.8% y/y. If the actual figure comes out significantly higher than expected, we expect more of the euro bulls to come out of the woodwork and it would be another move lower for GBP/EUR. Despite the fact that the ECB expect inflation to remain low for a prolonged period, a lower CPI reading could easily reignite talk about the possibility of negative deposit rates. This morning, there have also been comments from ECB member Hansson claiming there is room for the ECB to cut rates further. There has been some slight euro weakness on the back of these words however the market seems to have adjusted to the prospect of lower interest rates.

Eurozone figures such as GFK German Consumer Climate and German unemployment change could provide some support the euro. Last week we witnessed strong German Ifo Business Climate figures drive the GBP/EUR rate towards 1.1950 and push EUR/USD through 1.35. The same can happen again this week provided these numbers beat estimates.

The market eyeballs US data

After showing some signs of recovery, the disappointing Philly Fed manufacturing Index has placed the dollar on the back foot once again. The positive flash manufacturing PMI and unemployment claims figures were not enough to limit dollar losses, and this suggests that US data is being watched even more closely after the last FOMC minutes. With the window slightly open for a December taper, economic figures from the US need impress in order for significant repositioning to take place, and increase demand for the dollar.

First up we have pending home sales due this afternoon, and this figure could get the ball rolling for a better week for the greenback. Building permits, CB consumer confidence, Core Durable Goods orders and unemployment claims are all due this week and will receive attention from the market. With the non-farm payrolls figure due next Friday, an extremely strong unemployment claims figure should help get some dollar optimism stirring ahead of the employment report next week.

End of week forecast

GBP / EUR	1.1950
GBP / USD	1.6140
EUR / USD	1.3450
GBP / AUD	1.7720

Sasha Nugent

Currency Analyst

Caxton FX

Caxton FX Weekly Report: Sterling takes a back seat after the BoE Inflation Report

Anything more from the BoE?
The BoE Inflation Report was released last week, and although the central bank is not in any rush to raise rates, the report displayed some optimism about the UK outlook. The Bank of England revised their UK growth forecast upwards, and their inflation projections downwards (under the assumption the Bank rate follows the market rate). What the currency market particularly focussed on, was the prospect of a rate increase in late 2015. With the labour market improving faster than expected, the BoE now forecasts the
unemployment rate will reach 7% quicker than the time frame given in the August Inflation Report.

This week, the main UK release will be the Bank of England monetary policy minutes and we doubt the language in the minutes will differ much from what we saw in the Inflation Report. Although the minutes are likely to highlight the improvement in the labour market, we may see some emphasis on the headwinds the UK economy still faces. A generally light calendar for sterling leaves it open for weakness and this could allow the dollar and euro to potentially drive GBP/EUR and GBP/USD lower.

What can the euro do to regain momentum?
The euro remained on the back foot for most of last week, especially against sterling. The BoE inflation report spurred demand for the pound and drove the GBPEUR rate above 1.19. The prospect of a rate hike from the BoE in 2015 is directing this rate upwards, and in order for the euro to regain control (at least in the short term), this week’s PMI figures need to provide some upside surprise. Last week we saw evidence of a slowing Eurozone economy and so any data that suggests a pickup in economic activity should put the euro in a better position against both sterling and the dollar. With a heavy calendar ahead for the US, it will be more difficult for the euro to push EUR/USD higher. There are still some bullish euro investors around, and it is more likely that the single currency will do better against sterling than the dollar.

Will we see more evidence in favour for Dec tapering this week?
Last week the Senate Banking Committee hearing for Fed Chair nominee Janet Yellen was the main topic surrounding the dollar. Despite some dovish comments, Yellen recognised the fact that the US economy is making progress and that QE could not continue indefinitely. These remarks helped limit dollar weakness and allowed cable to trade around levels seen earlier on in the day. The dollar however, finished the week on a bad note after Empire state Manufacturing Index came in below expectations. In the busy week ahead, there is plenty of opportunity for the dollar to pare back losses and build evidence to support the Fed’s tapering case. The FOMC meeting minutes will be released and this gives the market yet another insight on the Fed’s take on the US economy. More importantly, there could also be an indication of the likely timing of tapering, which will allow investors to begin to reposition their portfolios.

End of week forecast

GBP / EUR	1.1880
GBP / USD	1.6100
EUR / USD	1.3500
GBP / AUD	1.7110

Sasha Nugent

Currency Analyst

Caxton FX

Caxton FX Weekly Report: Will the BoE raise their UK growth projections?

Give and Take
Sterling had a good week last week as PMI figures gave the pound a solid footing to gain against its major currency pairs. Services PMI rose at the fastest pace in 16 years allowing sterling to direct the GBP/EUR rate higher. Industrial production figures also provided upside surprise and with a little help from the ECB, the GBP/EUR rate managed to breach 1.20. This week there is plenty of opportunity to see the pound build on current levels. UK inflation data is released and figures are expected to show inflation slowed for another month to 2.5%y/y. Unemployment data is also due and a continued improvement in claimant count numbers should encourage a stronger pound. The BoE will release its inflation report and this will be the main event for sterling. Optimism about the UK outlook has continued to increase and after the latest PMI numbers, we could see the Bank of England raise its projections for UK growth. More positive language from the central bank should be welcomed by the market, and we could see another push for 1.20 in the days ahead.

More euro weakness to come
The euro has already experienced some significant weakness after the ECB unexpectedly cut rates to 0.25%. Despite the large movements, we could see more weakness this week depending on the outcome of Eurozone GDP readings. Any downside surprise in these figures could possibly encourage more euro selling, and provide further justification for the ECB’s rate cut. Significant releases from the UK should also support a move to drive GBP/EUR higher, especially if the BoE raise their forecasts for UK growth. The euro has managed to reverse some losses so far today, with the EUR/USD rate climbing towards 1.34 once again, and GBP/EUR declining towards 1.19, but it is unlikely that this can be maintained in the days to come. With the window for a December taper ajar, the euro also remains vulnerable against the dollar.

Non- farm payrolls puts greenback back in the race
Non-farm payrolls came in significantly above expectations, and this has prompted some increased demand for the dollar. The figure highlighted that despite the deceleration in payrolls, the labour market is still in decent condition. Although this figure alone isn’t enough to warrant a December taper, it does open the door to the possibility which should be enough to keep the dollar in better condition going forward. Economic releases this week should also support a firmer dollar and encourage some optimism about the US economy.

On Thursday, Janet Yellen will face the Senate Banking Committee for a grilling before deciding whether to send her nomination for full Senate approval. While Yellen only needs a handful of votes from Republicans in order to pass necessary procedures when her nomination reaches the Senate, Republicans will not hesitate to scrutinise a policy which they feel is building up future inflationary pressures.

End of week forecast

GBP / EUR	1.1980
GBP / USD	1.5950
EUR / USD	1.3350
GBP / AUD	1.7100

Sasha Nugent

Currency Analyst

Caxton FX

Non-farm payrolls revives the tapering debate

The dollar experienced another boost of momentum today after non-farm payrolls beat estimates adding 204k workers vs 120k . The release highlighted that the Federal shutdown hardly had an effect on employment, and suggested that maybe the labour market is healthier than previously thought. This is likely to reignite the tapering debate. The shutdown as well as some less impressive figures from the US, dampened expectations that the Fed will begin tapering in December, and many market participants believed it was more likely to begin in the New Year. These figures have reopened the possibility of a December taper, and this should result in a firmer dollar in the weeks ahead.

Sasha Nugent
Currency Analyst
Caxton FX

Caxton FX Weekly Report: Euro takes a back seat as inflation puts pressure on ECB

Can sterling remain above 1.18?
The eurozone inflation and unemployment data allowed GBPEUR to recover from levels below 1.17, to start the week above 1.18. Today, UK construction PMI beat estimates, and this has seen a slightly revival in the GBPEUR rate. Last week we saw a solid manufacturing number do little for the pound suggesting investors need more solid excuses to sell euros to see sterling really get back in its stride. The Bank of England will announce their rate decision on Thursday, and with monetary policy expected to remain on hold it is unlikely this will do much for the pound. There is plenty of downside risk against the dollar, and with fresh optimism brewing, it is possible GBP/USD could continue to trend downwards.

It’s time to let the euro take a back seat
After sessions of pushing the GBPEUR rate gradually lower, euro strength has eased, and it is now much more vulnerable that we have seen in recent weeks. The ECB rate announcement and press conference will be the key. The poor inflation figures released last week, has fuelled speculation that a rate cut may be needed in order to curb the eurozone’s problem of slowing inflation. If the ECB decide to hold rates, focus will then be on whether the central bank sees rate cuts in the future, and if not, what other tools are available. European Banks are falling short of excess liquidity and with time running out, the market will also be looking for an indication of whether these banks will be supported through another round of LTROs. For the first time in a while the euro will on the back foot, and this presents the opportunity for both sterling and dollar to dictate the direction of the GBPEUR and GBPUSD rates.

Renewed optimism supports a firmer dollar
Decent economic figures coupled with a less dovish central bank have helped the dollar start this week in better position. Whether greenback will be able to maintain these gains is largely dependent on data releases this week. Non-farm payroll is due on Friday, and economists expect this reading to show employers hired less workers before the shutdown. If this proves to be true, we may see a reversal in some of the dollar’s recent momentum as figures suggest that the pace of hiring continues to slow. After the central bank highlighted the need for more evidence to support tapering, a weak employment report even before the shutdown would rather encourage the central bank to take a slightly more dovish stance. The advanced GDP q/q reading will also be of interest, and a stronger figure here should be welcomed by the market. A dovish ECB may be enough to keep the dollar in control of EUR/USD, especially if the ECB hints that a rate cut is on the table. However, to maintain gains against sterling will be more difficult, and other economic figures such as ISM manufacturing and unemployment claims are needed to support downward movement in GBP/USD.

End of week forecast

GBP / EUR	1.1850
GBP / USD	1.5940
EUR / USD	1.3480
GBP / AUD	1.6820

Sasha Nugent

Currency Analyst

Caxton FX

Lose/lose situation

It was only a few months ago when we witnessed dollar domination but now with cable above 1.61 and EUR/USD reaching for 1.37, it all seems like a distant memory. Initially the Fed tapering debate was steering the greenback to victory, and although we all knew the US had to raise the debt ceiling, it didn’t seem like such a big deal. How wrong we were! The US government managed to raise the debt ceiling before the Oct 17 soft deadline, which wasn’t really a major surprise at all. To think that the US government would go into shutdown was not shocking, but to see the government default on its debt was unthinkable. Although the government pushed the deal to the brink of the deadline, the market wasn’t as shaken as dollar weakness would suggest, and seemed pretty confident an agreement would be made.

So what’s the problem? The problem is that the issue has not exactly gone away. Once the democrats and republicans agreed a deal, the dollar shot up. That was short-lived, and should rather be viewed as a little sign of relief. It didn’t take long for those losses to be reversed and it almost seemed like the US government had not come to an agreement at all. Lifting the debt ceiling till February did half the job; it removed the risk of default but only in the short term. The fact that we may have to revisit this situation again come early next year is what is troubling. The budget deal meant no default and the possibility of a future default, all at the same time.

The shutdown that lasted 16 days is likely to have hampered growth in the US, which has consequences for the Federal Reserve. The health of the US economy has been clouded by the partial shutdown, and so the central bank may need to wait until next year to warrant a reduction in stimulus. Considering this has been the backbone of dollar strength this year, the odds are no longer in the greenback’s favour. The days where strong non-farm payrolls could easily encourage a stronger dollar may have faded for now. Economic fundamentals need to produce some stellar results to see a bounce in dollar momentum, and reignite the tapering debate that has backed the strong dollar performance we saw some months back.

Sasha Nugent

Currency Analyst

Caxton FX

Caxton FX Weekly Report: Sterling rebounds while dollar remains weak

Sterling gets back on its feet
The pound looks to be stabilising after some weeks under pressure against most of its currency pairs. Demand for the euro remains fairly robust and will continue to trouble sterling as the pound attempts to push the GBPEUR rate back to levels we witnessed in September. Above-expected retail sales helped sterling to start the week in a solid position, however US and eurozone data will not make it easy for the pound to remain in control. CBI industrial order expectations and the Prelim GDP readings should do enough to keep the currency competitive. The BoE monetary policy minutes will be of interest, especially after MPC member Broadbent said the BoE has room to raise rates before borrowers get into great difficulties. Although Broadbent did stress that rates would only rise once the economy is in good health, any sign of slightly hawkish rhetoric in the monetary policy minutes will definitely be something to look out for.

A strong euro has room to get stronger
What could be regarded as an overvalued euro still has room to push further, especially against the dollar which has already seen the wrath of many other currencies. With EURUSD at levels above 1.3650, solid eurozone PMI data due late this week could definitely encourage the rate to move closer or even breach 1.37. There is, however, enough resistance at this level and with some delayed US fundamental data releases, we could see the euro need to put in a bit more work if 1.37 is to be reached.

It is not as clear cut against sterling, which is making a decent rebound from the weakness seen earlier this month. Nevertheless, the euro still has plenty of opportunity to direct both the GBP/EUR and EUR/USD rates this week, and it will definitely be interesting to see at what level EUR/USD goes too far, triggering profit-taking and the selloff we saw against sterling a few weeks back.

The US government raise the debt ceiling but the problem hasn’t gone away
Market movements are almost as if the US government is still in partial shutdown. The dollar remains weak and the effects of a prolonged debt solution continue to weigh on the greenback. The issue now is apparently the fact the debt deal agreed last week was only a short term deal, and it won’t be long until the US is back in the same situation. The hope is that by then, the democrats and republicans would have had enough time to debate and we won’t be seeing another partial shutdown. For now, though, the markets look to be on the doubtful side, and the struggle to see dollar strength emerge looks more like a lengthy one. It looks like the dollar will remain on the back foot for this week, and with the market’s finger hovering around the sell button, solid US figures are likely to only provide the currency with a little support.

End of week forecast

GBP / EUR	1.1800
GBP / USD	1.6120
EUR / USD	1.3640
GBP / AUD	1.6700

Sasha Nugent

Currency Analyst

Caxton FX

October 2013 Monthly report: The UK, US and Eurozone are all on data watch

UK data releases have continued to provide upside surprise for the majority of September, keeping sterling on the front foot against the euro and US dollar. Sentiment has also improved, however the better sterling does, the more of a problem it causes for Carney. The big question is whether sterling can remain robust through this month also, or if this is too much to ask for.

Eurozone figures have been a bit more disappointing this month, and sterling has taken advantage of this, strengthening gradually as September progressed. Flash PMI data didn’t do the euro any favours either with manufacturing figures disappointing while the services figures have improved. The third consecutive win for German Chancellor Angela Merkel ensured policy consistency ultimately, benefitting the euro, although economic data must improve for the single currency to remain competitive.

September ended badly for the dollar and this month it all begins again. The Federal Reserve kept their asset purchase programme on hold for yet another month which weakened the dollar and sparked uncertainty about the strength of the US economy. Failure from the government to come to an agreement about the debt ceiling has also hurt greenback and the currency will be under huge pressure this month. Eyes will be glued on the US economic figures, although a partial shutdown may prevent important numbers such as non-farm employment data to be released. Provided US government can come to an agreement in time, and economic figures meet expectations, we may see taper talk brewing once again.

Can sterling keep it up for another month?

The standard the UK has set for itself over the past month has been a relatively high one, with economic figures continuing to provide upside surprise and further suggest a robust UK recovery. The main question for the UK this month is whether this impressive stream of figures can continue. Last month we saw the unemployment rate unexpectedly fall to 7.7%, as well as the claimant count figure drop by 32.6k, a significant driver of sterling momentum. If UK figures broadly provide the upside surprise that we have seen of late, we could see sterling continue to dominate against some of its major currency partners.

The Bank of England will announce the official bank rate for October on Thursday 10th (12:00), and the markets will definitely be listening attentively to the accompanying statement (if provided). The Governor is likely to reiterate the central bank’s dovish stance, and attempt to enforce the bank’s commitment to maintaining low rates in order to support the UK recovery. What’s even more interesting is the fact that the better the UK economy does, the more pressure is applied on BoE Governor Mark Carney in relation to the forward guidance he announced a few months ago. Questions have been brewing about whether the central bank can actually keep rates at 0.50% with inflation already above the central bank target and increasing economic activity likely to increase price pressure. As long as this month’s figures outperform, the market will continue to question forward guidance so we could see sterling continue to gain gradually in October.

GBP/EUR

Sterling still outpacing the euro
Impressive European data has been lacking for the majority of the month, with the euro missing out on some good opportunities to strengthen against sterling. German IFO business climate figures came in below expectations and Flash Manufacturing and Services PMI showed some imbalances in the development of the euro-area. French, German and the Eurozone aggregate manufacturing figures all came in short of estimates while services figures surprised to the upside, suggesting an uneven recovery. The ECB President Mario Draghi has done little to bolster the currency as his most recent speeches have emphasized the ECB’s willingness to use any instrument necessary to defend its monetary stance. Draghi highlighted that the recovery is still fragile and therefore maintaining low rates was crucial to stabilizing the eurozone economies. The ECB seem adamant to enforce that they do not want money markets to become too enthusiastic about the progress of the eurozone and that the central bank still has tools to prevent rising borrowing costs. The market will be following this rhetoric throughout October and economic releases will also be eyeballed to see if it continues to point to an improving euro area. Italian political instability will also be a hot topic for the month as the former Prime Minister Berlusconi called for elections “as soon as possible”. This has caused uncertainty and risks euro momentum if investors become increasingly worried about politics in the region’s third biggest economy. A UK economy which is building up steam, and a US economy which is flooded with tapering speculation may cloud any developments in the eurozone and therefore limit euro gains. We have already seen this reflected though GBP/EUR highs of 1.1988 in September, levels not seen in over six months. We expect the euro to be on the sidelines against sterling this month, gaining a little momentum on the back of better data releases and positive news. If US figures show an improving economy, especially better employment figures then euro could be no match for the dollar either.

GBP/USD

The Fed talk rambles on 

Last month we witnessed the dollar plummet as a result of the Fed holding stimulus constant for another month. After the announcement, various Fed members spoke and said that stronger economic signals were needed in order to warrant such an adjustment in Fed policy, in particular, more positive employment figures. Although the US unemployment rate is now down to 7.3% it was rather a result of lower labour participation than from more people finding jobs. US economic releases will be a focal point this month and as they improve, it is likely to spark tapering speculation once again, boosting dollar momentum. Non-farm employment figures and the unemployment rate due this week will be major drivers of dollar performance and could possibly set the tone for the rest of the month. Providing the possibility of a stimulus reduction remains on the table, even if it is a small taper, we should see the dollar begin to reverse losses seen last month.

However, October is also the deadline for the US government to come to a conclusion about the debt ceiling, and with the government already in partial shutdown, the release of fundamental figures such as US employment data could be hindered. With the market seeking this information in order to gauge the Federal Reserve’s next policy move the dollar will remain vulnerable at least until this is solved. The uncertainty surrounding the issue has increased demand for safe haven currencies such as the swiss franc and the yen and for now has drawn the attention away from the tapering debate. 

It will be a struggle for the dollar to rebound this month, as potential sterling gains and any upbeat figures from the eurozone will attempt to limit dollar strength. As long as the budget deal is reached in time, we maintain our view that greenback will push for a modest recovery in the weeks ahead.

GBP/EUR: 1.1950

GBP/USD: 1.6025

EURUSD: 1.3425

Sasha Nugent
Currency Analyst
Caxton FX

BoE edges towards QE, Fed edges away, while the eurozone remains firmly in recession

We have to hold our hands up and admit that we were caught well and truly offside with respect yesterday’s MPC minutes. We did not even fully expect David Miles to continue voting for QE but not only did he stand firm, he recruited to additional doves to his cause in the shape of Paul Fisher and (more significantly) Sir Mervyn King. With the merits of an interest rate cut also carefully discussed, it was no surprise to see sterling take a beating as a result. We have to now change our position on the BoE’s monetary policy outlook and expect an additional top-up of QE around May time. Not good news for sterling, which continues to suffer from weak growth and the high probability of a UK debt downgrade.

By contrast, the minutes from the US Federal Reserve’s recent meeting gave a real boost to the US dollar last night. They revealed that Bernanke & Co are assessing when and how to scale back their QE3 operations, which was a major driver of dollar-weakness in the last few months of 2012. There have been hints that substantial improvements to the US unemployment rate would be needed before QE3 was wound down but the minutes revealed there was some support for doing so before such improvements are seen. It goes without saying that there remains majority support for maintaining QE3 as it is until greater progress is made with the US recovery and no change to this looks particularly imminent. However, the discussion and the divergence of views within the Fed could lead to a tapering off of QE3 later on in the year. This is why the dollar has rallied.

From the eurozone, we have had yet more weak growth data. A German economic sentiment survey was excellent earlier on in the week but this morning’s PMI figures pointed to a slowdown in the powerhouse economy this month. The German manufacturing sector remained in growth territory by only the smallest margin. Meanwhile, French figures pointed to a sharp dip further into contraction, against expectations of stabilisation. The same is true for the eurozone as a whole, which is set to contract again this quarter.  This is being reflected in a weaker euro today, though GBP remains very vulnerable. 

Richard Driver
Currency Analyst
Caxton FX

February Currency Outlook: GBP, USD, EUR

February 2013 Corporate Report:  Sterling friendless

January was another rough month for the pound, against almost every major currency, and the coming weeks do not look likely to be particularly fertile for a recovery. Sterling has been among the poorest performing currencies in the market, with a wide range of concerns over the UK economy weighing heavily. There are risks of a triple-dip UK recession, which in turn raise the probability of further quantitative easing from the Bank of England and a loss of the UK’s AAA credit rating. Until UK growth shows some signs of a recovery, the pound is likely to remain under pressure.

The euro’s remarkable rally continued in January, helped by further market calm in the eurozone and subsequent improvements to global market sentiment. ECB President Draghi gave the euro plenty of support by quashing speculation that his central bank would opt to cut interest rates (watch out tomorrow for further rhetoric). This optimistic approach has actually been bolstered by significant improvements to German economic data, even if growth in Italy, Spain and France remains very weak indeed. It only takes one look at bond yields in Italy and Spain to realise that nerves towards the debt crisis are at a low ebb and that confidence is pretty stable. That said, the past week has seen tensions rise ahead of Italy’s election this month.

Other than against the euro, the US dollar is also in pretty good shape. However, the recent weak US GDP figure for Q4 2012 hasn’t done the greenback any favours and will play into the hands of Ben Bernanke and the other dovish leaning policymakers within the US Federal Reserve. Positive sentiment towards the euro looks likely to limit the dollar’s gains in the coming weeks, but we still expect the USD to have a strong 2013.

GBP/EUR

Triple-dip fears dog the pound

Sterling is hugely out of favour at present; depreciation was so drastic in January that sterling’s trade-weighted index dropped by the most since February 2010. Economic weakness, speculation of more UK monetary easing and a more general loss of faith in the GBP as a safe-haven are all issues which have weighed heavily. The warnings as to a UK debt downgrade have been understandable and whilst predicting the timing of a downgrade is tricky, it would surprise us if the move was delayed beyond June.

Does sterling really deserve the battering it has received? Well, it certainly deserved some punishment; negative growth and a lack of progress on the UK’s debt situation are always issues likely to make themselves felt on the exchange rates.

There remain some brighter spots within the UK economy; the Funding for Lending Scheme appears to be bearing some fruit - bank lending is on an uptrend. The UK labour market continues to defy the wider domestic downturn. However, these rare good news stories have been of little use to sterling, with investors questioning how positive these factors can really be if they are not resulting in any genuine economic growth.

Unfortunately it’s quite clear that it will not be a particularly robust start to 2013, thanks to January’s snowy weather. The truth is that last summer’s Olympics concealed very weak underlying growth, which will become even more apparent over the rest of Q1. Sterling has at least been granted the relief that the UK services sector returned to growth in January but the risks of a triple-dip recession are still finely balanced.

Despite weak growth, we do not expect the Bank of England to opt for another dose of quantitative easing at its February meeting on Thursday, with most members satisfied with the Funding for Lending Scheme as an alternative to QE. David Miles is likely to remain the only voter in favour of QE in the February 7^th meeting; we expect the MPC under Sir Mervyn King to continue opting against further easing.

What will be more interesting on February 7^th will be Mark Carney’s appearance in front of the Treasury Select Committee. The market will be watching very closely for clues as to how Carney, who will take over from King as BoE Governor on July 1^st, will approach monetary policy. Unlike King’s comparatively hawkish doubts over the efficacy of more QE, Carney has been vocal on the utility of further easing and has pointed to other “unconventional instruments” which suggests he will strike a more dovish tone on Thursday. This is unlikely to be good news for the pound.

Germany perks up to help the euro

Once again, it’s been fairly quiet on the eurozone front, which has been a major factor behind the ongoing gains being made by the euro across the board. The weak investor sentiment towards the eurozone that characterised so much of 2012 is being unwound, as the risks of a eurozone break-up recede.

German data has been particularly encouraging in recent weeks with forward-looking sentiment and confidence surveys hitting multi-month highs. Still, the PMIs out of the eurozone as a whole continue to point to further economic contraction, which should lead to euro-weakness later on in the year. However, at present the market appears content to overlook awful growth and celebrate the signs that the worst of the debt crisis is behind us. This is really why GBP/EUR’s decline has been so aggressive.

There is evidence of burgeoning political tensions in the eurozone. Italy’s elections are scheduled for February 24-25 and considerable uncertainty lingers with respect to the outcome, particularly with the latest polls suggesting that Berlusconi is closing the gap. In addition, there is scope for Berlusconi’s PdL party to block the governing coalition’s laws in the upper house. Elsewhere, there are calls for Spanish PM Rajoy to resign after having been embroiled in a corruption scandal. This could potentially derail Spain’s reform programme and damage the stability we have seen in peripheral bond yields.

On the monetary policy front, ECB President Draghi has been very helpful to the euro, sending strong signals that he will not elect to cut interest rates once again, regardless of weak eurozone growth and record-high unemployment. Also propping up the euro has been Draghi’s refusal to express concern at the euro’s impressive rally to 15-month highs against the pound and US dollar. Euro bears will be watching this Thursday’s press conference very Draghi closely for signs that he is uncomfortable with the euro at current levels. We suspect they may be disappointed.

Sterling has depreciated by around 6.0% from where it started the year (marginally above €1.23). Amid the ongoing anti-sterling sentiment that is still simmering away, we don’t expect that this pair’s trough of €1.1470 will be as low as it goes. If Draghi sounds in confident mood on Thursday, we’d expect the downside to be tested once again in the coming weeks, with significant risks of a move down to €1.1364 (88p). However, we do expect this pair to bottom out soon and remain confident of a sterling recovery thereafter.

GBP/USD

Dollar flexes its muscles despite stalling US growth

The news out of the US economy has been typically mixed over recent weeks and there was no real change in stance from Ben Bernanke and the US Federal Reserve as a result. The fourth quarter US GDP figure for 2012 actually confirmed a surprise 0.1% contraction, rather than the modest 1.1% growth that was expected. In addition, the US unemployment rate jumped back up to 7.9%, which considering Bernanke’s obsession with bringing the jobless rate right down before ending QE3, was not good news for the US dollar.

The market has been correct not to panic at the US economy’s weakness at the end of last year, much of which can be put down to the effects of Hurricane Sandy. The Fed was clear that it was a case of growth pausing as opposed to it representing the beginning of another dip back into recession.

The GBP/USD pair’s sharp decline in the year to date has finally started to reflect the contrasting conditions and outlooks for the UK and US economies. Whilst the US has suffered some temporary weakness, 

underlying growth is still in decent shape and this will continue to be the case in 2013. The UK, by contrast, did not grow in 2012 and will struggle to eke out much growth in 2013.

An interesting theme over recent weeks has been the US dollar’s strong performance against currencies like the GBP, despite its extreme weakness against the EUR (EUR/USD climbed to a 15-month high only last week). We are already seeing concerns over the political situation in Spain and Italy spark doubts over how much higher EUR/USD can go. If we see the downward correction in EUR/USD that we continue to expect, then we expect GBP/USD to suffer as a result. Sterling is struggling with weak domestic news as it is, without major euro-dollar flows adding further pressure. This may well be delayed until later on in the year but it would be no real surprise if it came sooner. 

We may see GBP make another attempt above the $1.57 level in February but we expect that would represent an attractive level at which to sell. This should signal another move lower and potentially take this pair to fresh 6-month lows below the recently hit $1.5650 level.

GBP/EUR: €1.14

GBP/USD: $1.55

EUR/USD: $1.3650

January Outlook: GBP/EUR/USD

The end of 2012 was characterised by euro strength and dollar weakness, with sterling’s performance falling somewhere in between. We have seen GBP/USD rally to fresh highs lately, while GBP/EUR has posted new multi-month lows. Whilst our central scenario is that we will see these two trends reversed over the course of 2013, we note significant short-term risks to sterling vis-à-vis the euro. A weak UK GDP figure for Q4 2012 or a loss of the UK’s AAA credit rating are likely to keep GBP/EUR below €1.25 in the coming weeks, which is significantly below where we see it trading by this time next year.

GBP/EUR

Sterling suffering from UK triple-dip fears

December’s growth data pointed to a disappointing slowdown in November, with the UK’s key services sector only narrowly avoiding a monthly contraction. We have been warned in no uncertain terms by the Bank of England that the UK economy could well have contracted in Q4 2012. The available figures do indeed point to this, even if it is likely to be only marginal. Still, talk of a triple-dip recession is hardly going to foster a mood of confidence towards the UK recovery.

Looking ahead, the near-term outlook for UK growth is likely to be flat, as the economy wrestles with ongoing weakness in demand from the eurozone. We are simply not seeing the rise in UK exports that is necessary and with the eurozone poised to continue contracting throughout the first half of this year, this problem is unlikely to be addressed.

Chancellor George Osborne’s Autumn Statement, delivered in December, told us that the UK government is sticking to its guns on fiscal consolidation, which is likely to continue constraining growth, though we agree that this approach is essential. However, weak growth in combination with Osborne’s failure to make progress on bringing down the country’s soaring debt levels are likely to convince at least one of the major credit rating agencies to downgrade the UK’s triple-A rating. This is a risk for sterling, though we are among those who are sceptical about just how much this would hurt the pound.

In terms of BoE monetary policy, we still only have one MPC member (David Miles) voting in favour of more quantitative easing. The vast majority of the voters appear content to allow the effects of the Funding for Lending scheme to continue feeding through and unless we see evidence of further significant economic weakness, we don’t expect any more QE until at least the second half of 2013. As such, this month’s BoE meeting should yield no major developments, though the release of the MPC minutes on Jan 23 will be as closely watched as ever.

Euro strong but fundamentals point to a decline

As far as the euro is concerned, we have to admit that we are surprised to report GBP/EUR’s recent decline to an eight-month low below €1.2150. Supporting the euro is the fact that Greece is out of the woods for the time being and eurozone tensions have eased accordingly. The key driver of the euro’s resilience, as ever, is the perpetual diversification of USD into EUR by Middle and Far Eastern central banks. 

Nonetheless, we continue to foresee a euro decline through 2013, led by declining economic fundamentals and ongoing eurozone risks. It goes without saying that a weaker euro would benefit the eurozone economy. However, using rhetoric to this effect was a rather dicey move for EU officials last year, amid concerns over the very existence of the euro. We should see greater opportunity for policymakers to take advantage of calmer markets and talk up the merits of a weaker euro this year, without highlighting any existential crisis on the part of the single currency.

In terms of what to look out for this year, elections in Germany and Italy stand out as risk events, as does the likelihood of a Spanish sovereign bailout request sooner rather than later. Fortunately for the euro, Germany doesn’t go to the polls for another nine months, while Greece will likely stay out of the headlines for time being. Longer-term, we do expect the eurozone’s problem child to continue missing its targets, whilst there is also a risk of a breakdown of the Greek coalition.

Political uncertainty in Italy poses one of the most significant risks to the euro in the short-term; elections are likely to be held in March. This should put Spanish bond yields under pressure, as would a Moody’s downgrade of Spanish debt to junk status, which is looking probable based on comments made by the rating agency last October.

Sterling has bounced off its multi-month lows in the €1.2150 region and is currently trading around €1.2350. We expect this pair to remain fairly stable around this level in January, before edging back up towards €1.25 in the coming months.

GBP/USD

US steps away from the fiscal cliff

2013 has kicked off with a bang thanks to the rather predictable eleventh hour deal to avoid the US fiscal cliff. The absence of such a deal would have seen highly damaging tax rises and spending cuts coming into the force on January 1. The US Congress has taken a leaf out of the eurozone’s book by effectively kicking the can down the road but fiscal tightening will nevertheless be a major feature of the US economy this year. The Congressional Budget Office is expecting the US economy to grow by around 2.0% in 2013, which factors in a 1.4% reduction due to spending cuts.

The fact is that nothing of any real substance has yet been decided on American fiscal reform. The next two months will be the subject of further fierce negotiations on what cuts are made and where. The dysfunction of the US political system over recent years almost guarantees a further headline grabbing crisis in the coming months. Indeed, Moody’s and Standard & Poor’s have ramped up the pressure by branding this week’s deal “insufficient.”

Where does this all leave the GBP/USD pair? Well, the dollar has performed remarkably poorly in recent weeks and sterling actually mustered the strength to rally to an impressive fifteen-month high of $1.6380 in early New Year trading. However, the dollar is showing some initial signs of a rebound with this pair having retreated by over two cents from the aforementioned high.

Buying USD above $1.60 remains attractive

Put simply, we have seen any level above $1.60 as a strong opportunity to buy USD for a while now, so current levels of $1.6150 still look highly attractive. We have to admit that this pair finished 2012 significantly higher than we expected, but we remain confident that the greenback will find its feet in 2013. Behind this is a belief that economic fundamentals will acquire a greater share of market focus this year. With the US economy easily outpacing its US and UK counterparts, even after the effects of fiscal consolidation are factored in; increased focus on economic performance should benefit the greenback. In the short-term though, January should provide some more shelf-life for this pair above $1.60.

One month direction:

GBP/EUR: €1.2375

GBP/USD: $1.61

EUR/USD: $1.30

Richard Driver

Currency Analyst

Caxton FX

Caxton FX Currency Round-Up: GBP/EUR, GBP/USD

Euro under pressure as ECB indicates cut to deposit interest rates 

The euro has been hit by a few different factors in the past few sessions. ECB President Draghi gave the single currency a knock last Thursday by revealing that whilst there would be no change to the Bank’s policy this month, we might expect some monetary easing next year. From Draghi’s comments, we no longer draw the conclusion that the ECB will cut the headline interest rate in Q1 next year. However, there were real indications that if growth disappoints and eurozone nerves spike in the coming months, we could see a cut to the deposit rate in a bid to encourage banks to step up lending.

Both the ECB and the German central bank (the Bundesbank) have delivered some fairly gloomy growth predictions in the past week. The former now sees the eurozone economy contracting by 0.3% next year, after previously predicting growth of 0.5%. Meanwhile, the Bundesbank disappointingly slashed its forecasts for German growth next year; reducing its June forecast of 1.6% growth to 0.4%.

We have had some good news today on the German front however, with a key economic sentiment survey hitting a seven month high. The latest sentiment and confidence surveys out of Germany suggest the country may narrowly avoid a recession, though a contraction in Q4 2012 looks highly likely. The German economy may not be in as weak as many had expected but the hopes for the rest of the eurozone are rather dimmer. This could well be highlighted by Friday morning’s eurozone PMI growth figures.

Italy hits the headlines as PM Monti announces resignation plans

Technocratic Italian PM Mario Monti dropped a bomb over the weekend by announcing his intention to resign once the Italian parliament has passed its 2013 budget. Berlusconi is waiting in the wings but his approval ratings suggest this is too big a mountain for even him to climb. Nonetheless, this political uncertainty - which raises serious question marks over Italy’s ability to deliver the necessary cuts and economic reforms to keep bond yields stable - could weigh on the euro significantly in the coming weeks and months.

All eyes on US Federal Reserve QE decision

Last week’s surprisingly strong figures from the US labour market are unlikely to satisfy the US Federal Reserve at its meeting over the next two days. We expect the Fed to decide to replace Operation Twist (which is set to be concluded) with a further $40bn in asset purchases, to bring its QE programme up to $80bn per month. There are various tweaks that the Fed can make to its monetary policy, to which the US dollar will respond differently. Given that sterling is trading at a very healthy rate of $1.61 at present, we would urge dollar-buyers to act now.  

End of week forecast

GBP / EUR	1.2450
GBP / USD	1.60
EUR / USD	1.29
GBP / AUD	1.53

Sterling has enjoyed a welcome little recovery against the euro amid some rather negative eurozone developments. At €1.24, we have not abandoned hopes of one last push for €1.25 before the end of the year. There is not much to get excited about with respect to sterling at present but we do expect enthusiasm towards the euro to wane from here. A move below €1.23 is looking increasingly unlikely.

Richard Driver
Currency Analyst 
Caxton FX

December Monthly Report: GBP/EUR, GBP/USD

Greece drives euro rally but US fiscal cliff looms

Sterling was broadly unchanged across the exchange rates through November, except unfortunately (depending on your exposure, of course) against the single currency, where a significant decline was seen. We have seen some progress from the eurozone in recent weeks, from Greece in particular. A deal was struck to put the country’s debt on a more sustainable path, one that could give it a realistic chance of emerging out of the current crisis, though this is clearly many years away. Most importantly, the risk of a Greek exit and euro break-up has receded – the key factor behind the euro’s latest rally.

There has been something of a dark cloud hanging over the pound in recent weeks, caused by a mixture of negative UK data and pessimistic growth forecasts from the Bank of England. This in turn filtered into speculation that the UK could lose its AAA credit rating before long.

These factors haven’t stopped the pound from sustaining some very respectable levels against the US dollar however. There has been a marked improvement in growth data from the likes of the US, China and even the eurozone in recent weeks, which in combination with progress in Greece has lifted investor sentiment from a mid-November slump. However, with little progress being made on the US fiscal cliff issue, the dollar could well bounce back before the end of the year.

GBP/EUR

Sterling weak but downside limited despite weak UK data

It has been a difficult few weeks for this pair. The Bank of England brought the market crashing back down to earth with some pessimistic growth projections in the aftermath of the surprisingly strong Q3 UK GDP number (1.0%). Sir Mervyn King & Co have been very deliberate in managing our expectations with respect to the UK economy’s performance in the final quarter of the year, highlighting in the Quarterly Inflation Report that there are significant risks of another contraction.

November’s UK figures certainly didn’t point to a very robust start to Q4, with UK manufacturing sector growth contracting and the services sector giving its worst showing in almost two years. We also saw the worst UK claimant count update in over a year (after a very good few months it must be said).

The recent public sector net borrowing figure came in worse than expected thanks to tax revenues continuing to fall short, which painted a grim picture of George Osborne’s deficit-reduction plan. With Moody’s Investor Service having recently cut France’s AAA credit rating, many in the City are speculating that UK debt will be dealt the same hand before long. There is a high risk that one of the big rating agencies will swing their axe in the UK’s direction in the coming months and this has left its mark on sterling.

It hasn’t been all bad news as far as the pound is concerned. UK inflation ticked higher to 2.7% from 2.3%, which may have discouraged one or two MPC members voting for QE in their November meeting. The minutes from that meeting revealed that in fact only one voter, David Miles, was in favour of extending the BoE’s quantitative easing programme. On balance, we do not expect any further QE from the BoE, which should be supportive of the pound in the longer-term. However, persistently weak UK growth is likely to continue fuelling QE speculation. In addition, the MPC minutes appeared to remove the option of an interest rate cut for the “foreseeable future.”

Greek disaster avoided

 From the eurozone, November was very much Greece’s month. With a deal being struck to avoid an imminent default and bring Greek debt under some recognisable control, the market may be able to put this particular eurozone worry on the backburner to some extent. Nevertheless, there remains a high degree of scepticism towards Greece’s ability to meet its targets and towards a lack of detail within the agreement. We know that Greece will be granted longer to repay its debt and that interest rates on that debt will be lowered. However, it is unclear how the intended bond buy-back (at a discount) will be funded and when it will occur.

Spain has this week made a formal request for its crumbling bailout sector, which is a relief as far as the market is concerned. This isn’t to be confused with a sovereign bailout though and Spain will surely be the subject of the market’s cross hairs once again before long. We don’ think PM Rajoy will be able to avoid requesting a full blown bailout, given the dire state of economic growth and the still elevated borrowing costs that the country is facing (despite recent declines). Any realistic analysis of Spanish growth and debt dynamics over the coming years suggests that a bailout is inevitable.

Concerns over the wider eurozone growth issue in the eurozone have eased somewhat thanks to some recent updates. Germany and France both showed unexpected growth of 0.2% in the third quarter, while Italy contracted by half as much as expected (0.2%).  Nonetheless, we see nothing within the more forward-looking figures (despite the recent upturn in the German business climate) to suggest the eurozone can avoid a recession next year.

Sterling is trading at fairly weak levels around €1.23 at present and we are sticking to our long-term and long-held view that this pair’s upside potential outweighs its downside risks. Our hopes for a move towards €1.25 by the end of the year remain intact and, more importantly, realistic. In the short-term however, there is a strong risk of a move down towards €1.2250.

GBP/USD

Sterling soaring against soft US dollar, but for how long?

This pair’s downtrend has been interrupted in the past fortnight by developments in Greece, which have had a very uplifting effect on market conditions. The avoidance of a messy Greek default and euro-exit saw global equities rally, weakening the US dollar significantly. The $1.60 level has been recovered as a result but as ever we view sterling to be on borrowed time above this psychological threshold.

The US economy continues to show evidence of a strong finish to the year, demonstrated not least by the recent revised GDP figure for Q3, which revealed an annualised growth pace of 2.7%. Consumer confidence continues to climb and we are seeing the US housing and labour markets make further strides.

With the Greek ‘can’ kicked down the road, focus through to the end of the year is likely to be dominated by the US fiscal cliff issue. On January 1^st 2013, a series of sharp US tax rises and spending cuts are scheduled to come into being, unless negotiations between the Democrats and the Republicans bear some fruit in the coming weeks.

The fiscal cliff could as much as half US growth next year and in doing so dent the global recovery considerably; the stakes are extremely high. It is broadly for this reason that we expect US politicians to put some sort of compromise together, in the same way we expected Greek negotiations to produce a deal. Nonetheless, nervousness over this game of ‘chicken,’ which could well go right down to the wire, is likely to lead to increased demand for the safe-haven US dollar in the coming weeks.

Sterling is trading up at $1.61 level, which we view to be an excellent level at which to buy USD. In our view, sterling is highly unlikely to set fresh highs above this pair’s fifteen-month peaks in the $1.6250-1.6270 area. Sterling’s headroom is looking increasingly limited from here and we expect a move lower in the weeks ahead.  

Richard Driver

Currency Analyst

Caxton FX

November Outlook: Euro set to decline

After some weak figures from the UK economy to kick October off, we have enjoyed a pretty steady flow of positive domestic news. The highlight has been the recent preliminary UK GDP figure for Q3, which indicated growth of 1.0%, almost doubling expectations. With headlines surrounding the UK economy’s emergence from recession, sterling has enjoyed some renewed interest, though with domestic growth so far this year almost completely flat, you don’t have to look far to find the sceptics.

As far as the US economy is concerned, conditions are certainly perking up. The recent advance US GDP figure for Q3 revealed annualised growth of 2.0%, so it was a case of anything the UK can do, the US can do better.  The Fed will also be encouraged by significant improvements in the US labour market. It appears that the recovery of the world’s No.1 economy from its mid-year slump, albeit later than expected, is well under way. Nonetheless, the risk of the US fiscal cliff continues to pose serious threats to US and indeed global growth in 2013.

It has been fairly quiet on the eurozone front in recent weeks. Spain remains frustratingly tight-lipped on the issue of a bailout request. However, we are heading into a crucial week in which the Greek parliament will decide whether or not to approve an austerity package that is essential to the release of the country’s next tranche of aid.

GBP/EUR

Sterling benefits as UK exits recession

Sterling spent much of October under pressure against the euro, with no major panic headlines emerging out of the debt crisis. Disappointing domestic data also kept sterling pinned well below the €1.25 level for long periods, with the services, construction and manufacturing sector updates all disappointing.

However, we have seen a decent turnaround in figures in the past fortnight or so, which has provided sterling with renewed support. The labour market continues to make impressive strides, as shown by the unexpected dip in the UK unemployment rate to a 13-month low of 7.9%, while retail sales were also in good shape in September. These figures were topped off by a 1.0% preliminary UK GDP figure, which was well above the 0.6% estimates that were prevailing in the build-up. With the data revealing that the negative growth that dominated the first half of the year has been recouped, the UK government enjoyed a rare sigh of relief.

MPC to vote against QE this month

This all leaves the Bank of England interestingly poised in terms of its next move. MPC members have been quick to warn that we can expect a much weaker growth figure from the fourth quarter, once the temporary factors of the Olympics and the bounce back from the extra Q2 Jubilee bank holiday are discounted. However, judging by the minutes from last month’s MPC meeting, not only is the MPC split on the desirability of another dose of quantitative easing, but there appears to be plenty of scepticsm with respect to the usefulness of such a move. In addition, there have been hints that the government’s Funding for Lending initiative, where bank lending is incentivised, is making a real difference.

There is plenty of reason to suspect that last quarter’s GDP figure was a temporary surge for an economy that still needs nurturing back to health. The latest updates from the services sector suggests the UK has made a soft start to Q4 but we nevertheless expect the MPC doves to fail to muster a majority vote in favour of QE this week.

Greece vote gets euro nerves jangling again

As far as the euro is concerned, focus has centred on the familiar issues of Greece, Spain and deteriorating eurozone growth. Greece will dominate the eurozone headlines this week, with PM Samaras presenting a controversial package of fresh austerity measures which will be voted on by the Greek parliament later this week. The vote will come right down to the wire, though we are expecting the package to be approved.

We are sticking to the ‘muddling through” assumption that Greece will do what is demanded of it and in turn will receive some concessions, along the lines of lower interest rates, extended loan maturities and extended austerity deadlines. The stakes are simply too high to allow the Greek saga to blow up again.

With Spanish bond yields coming away from the dangerous 7.0% mark in the aftermath of ECB President Draghi’s pledge to buy up unlimited peripheral debt, the pressure on PM Rajoy to request a bailout has eased somewhat. However, the market is likely to take an increasingly dim view of Rajoy’s ongoing procrastination through November (talk has emerged that he will wait until next year). Ratings agency Moody’s handed Spain some breathing space last month, sparing it the blow of downgrading its debt to ‘junk’ status but there is little doubt it will wield its axe once again if progress fails to emerge.

As ever, major concerns are stemming from the deteriorating state of eurozone growth, as the region is dealt round after round of austerity. Whilst the ECB now looks set to hold off from cutting interest rates until next year, declining demand from peripheral eurozone nations continues to filter into weakness in the eurozone’s core. German figures were yet again poor in October, compounding fears that the powerhouse economy is heading into recession. The region’s declining economy is really showing few bright spots, while the headlines out of the UK economy contrastingly highlight its re-emergence from recession.

Sterling is trading just below the key €1.25 (80p) level and direction from here over the coming weeks will really depend on whether the pound can make a sustained move north of this benchmark. We can’t discount another move back down towards €1.23 but we maintain expectations for this pair to move above €1.25 in the coming weeks.

GBP/USD

Dollar to benefit from upturn in US growth

Sterling has traded very positively against the USD in recent weeks but has finally suffered a downward correction in the past week. GBP/USD is still only a couple of cents off April’s multi-month highs above $1.62 with stronger UK data and diminishing risks of QE providing the pound with plenty of support at $1.60, just when a move back down to the $1.50s has looked on the cards.

The USD is attracting increased demand at present on the back of some strong US economic figures. The US unemployment rate fell to 7.8% in September, the lowest level seen in almost four years (though this bounced up to 7.9% in October). The advance US GDP figure for the third quarter came in above expectations at 2.0% (annualised), powered by a surge in consumer spending and a temporary boost from defence spending. November’s excellent employment update, suggests we can expect further improvements over Q4.

Global concerns to highlight dollar’s safe-haven status

With the fiscal cliff a month closer, so too are the risks of a massive hit to US growth. This in our view will increase appetite for the safe-haven US dollar as we approach year-end. Meanwhile, we are struggling for progress on the Spanish debt/growth problem and broader concerns with global growth should also underpin the greenback.

Whilst the US Federal Reserve is engaging in QE3, the US economy is still outpacing the UK by some distance and we believe this will soon be reflected in some dollar strength. The UK’s last GDP figure may have been impressive (1.0% in Q3) but looking at the year to date, growth has essentially flat lined and with the eurozone recession deepening, major risks to domestic growth remain.

This week’s US Presidential election makes short-term swings highly probable and highly unpredictable. Not only is it unclear how the dollar will react to whoever wins but there is also the issue of which party will control Congress. Our conservative bet is that the status quo will broadly remain, with Obama emerging victorious but with doubts remaining over his ability to strike a deal to avert the fiscal cliff. We maintain our position that that we will see this pair spend most of the rest of the year below $1.60. Sterling’s two-month low of $1.5920 should be tested soon and we believe this will ultimately be broken, paving the way for move back into the mid-$1.50s.

1-month Outlook

GBP/USD:  1.58

GBP/EUR: 1.2550

EUR/USD: 1.26

Richard Driver 

Currency Analyst

Caxton FX