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: 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: 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 

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

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 

What does the UK unemployment rate mean for monetary policy?

UK data delivered another surprise and according to the Office for National Statistics, the unemployment rate has dropped further to 7.1% from 7.4% bringing the 7% threshold given in forward guidance into question. With the unemployment rate now marginally above the benchmark, the need for the Bank of England to reassess the direction of interest rates is nearing.

Despite the labour market improving significantly faster than expected, the latest MPC meeting minutes suggest a rate increase is still unlikely to occur in the near future. The central bank sees no immediate need to raise interest rates, and with the inflation rate now on target there is even more room to maintain loose monetary policy. Of course the surprise drop in the unemployment will encourage the central bank to reconsider their view on the future for monetary policy, but the BoE will be cautious not raise rates prematurely.

This suggests that a re-evaluation of policy will rather result in an alteration in the central bank’s forward guidance, possibly a reduction in the unemployment benchmark to 6.5%, when the next quarterly Inflation Report is released on Feb 12. The market seems more excited about the fact that this unexpected result has brought the BoE closer to at least considering tightening policy, even if execution is not for a while yet. For now, this has been enough to keep demand for sterling rife.

Sasha Nugent

Currency Analyst

Caxton FX

Sterling bulls focus on GDP

This morning, UK GDP was released and as expected there was no revision to the preliminary reading of 0.8%q/q growth. The pound rallied on the back of this and sent cable shooting through 1.63. Similarly, the GBPEUR rate rose and is now fluctuating around the 1.20 level. Preliminary Business Investment figures were also released this morning and after falling 2.7%, business investment rose by 1.4%q/q below the expected figure of 2.3%q/q growth.

What is particularly interesting is that the market’s focus was on the GDP figure and the fact that business investment was below expectations meant little. In the opening remarks of the Inflation Report Press conference, Governor Carney emphasized the issue of absorbing slack in the economy, and stated that a strong and sustained recovery is needed in order to achieve this. Carney also stated that “A sustained recovery requires a revival of business investment”. Baring this in mind, it seems strange that the market’s attention is not being put on the fact that business investment growth is still slacking. The need for more robust growth has come from the horse’s mouth, yet the market feels the need to focus on a GDP reading that only confirmed what we had already known.

It is fair to acknowledge the rise in business investment and consider it positive, but surely the market needs to draw their attention towards the need for this type of investment to gain traction. A lot of sterling’s recent strength has been on the back of the possibility of a rate increase in 2015. We also know from the inflation report that we could have a situation where unemployment has reached the 7% benchmark, but the BoE maintains loose monetary policy. If the sterling bulls want to see a rate increase by 2015, they may want to pay a little more attention on the progression of factors such as business investment, which may help to gauge how sustainable the recovery is and therefore when the BoE will be likely to raise rates.

Sasha Nugent

Currency Analyst

Caxton FX 

More euro optimism anyone?

Even after the ECB cut rates a couple of weeks ago, there still seems to be some investors that are willing to put their money in to euros. The single currency has recovered from losses quite well recently, and even had sterling struggling to remain above 1.19 in the last session. Nothing has been particularly encouraging from the eurozone, and yet sterling has found maintaining 1.19 just as difficult as breaching and sustaining 1.20.

And then we get another reason to sell euros. Negative deposit rates!

Following the ECB’s surprise move to cut the interest rate to 0.25%, Bloomberg reported that the ECB is also considering a negative deposit rate. This spurred an unwind of euro long positions and sent the GBPEUR rate back to 1.20, while slamming the EURUSD rate below 1.35 once again. Evidence for short euro positions is building, especially against sterling where UK fundamentals are more impressive. Having said that, every time we believe it is time for the euro to continue to weaken, it finds some hidden strength and proves us all wrong. It may take more than negative deposit rates ensure the GBPEUR rate remains above 1.20.

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

UK Services PMI delivers the goods but for how long?

Over the past last few sessions, sterling has been struggling to maintain gains against the euro. Positive economic figures from the UK have done little to push the GBPEUR rate significantly higher, and even a solid construction PMI figure couldn’t do enough to force GBPEUR beyond recent levels. Yesterday the service PMI reading increased to 62.5 and showed the service sector grew at the fastest pace in 16 years, while new orders was at its strongest level since records began. This allowed sterling to finally return to the driving seat, with the GBPEUR rate shooting through 1.19.

In order to see more substantial moves, and to ensure sterling holds up against the euro, UK data needs to provide stellar results. With the picture brightening over the past few months, evidence suggesting the recovery is building momentum has grown and optimism about the UK outlook has increased. Today we have seen solid numbers from UK manufacturing and industrial production, and mixed results from the eurozone such as falling retail sales, and rising German factory orders. Initially the GBPEUR rate rose after the release of UK data, however German factory orders were enough to erase sterling gains and send the rate below 1.19 again. This shows that UK releases that are in line, or marginally above expectations are unlikely to produce enough momentum to keep sterling competitive against the euro.

While the pressure on the euro is helping sterling to direct GBPEUR higher, a more hawkish shift from the central bank will do more to ensure an upward trend in GBPEUR. The market is already predicting the central bank may raise rates earlier than outlined in forward guidance, but for now an increase in the BoE’s economic projections released next week should be welcomed by the market. This may provide GBPEUR with more sustainable support, helping to drive the rate higher in the near term.

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

November 2013 Monthly Report: US dollar stages a comeback

Sterling has remained on the sidelines for the majority of October. With some economic figures coming in below estimates, investors have adjusted their expectations accordingly, encouraging them to unwind sterling long positions. The pound is likely to remain on the back foot this month and we doubt economic figures can provide enough surprise to lure investors back into sterling. However, the latest Bank of England monetary policy minutes revealed a less dovish tone from the central bank, and if this continues, could help sterling resist a buoyant euro.

The market has been taking every opportunity to support a stronger euro, and despite some weak economic data, the single currency doesn’t seem to have run out of steam just yet. Even though the ECB outlined the importance of the exchange rate to the recovery, members haven’t displayed much concern towards euro strength. As excess liquidity in the eurozone declines, attention turns to the policy tools the central bank will use in order to support European banks.
Dollar weakness has continued into the new month despite managing to pare back some losses against both sterling and the euro. The US government standoff gave investors an excuse to sell dollars after the Federal Reserve kept monetary Policy unchanged in September. We should see the dollar begin to get back on its feet this month, as clearer data allows investors to get a better picture of the likely timing of tapering.

Not looking great for sterling in the month ahead 
It seems like the period of sterling superiority has faded, and now it is time for sterling strength to take a back seat. The market now views previous sterling strength as excessive, and with last month producing softer economic data, investors have been encouraged to reduce sterling holdings. Nevertheless the outlook on the UK economy hasn’t changed. Optimism regarding the UK recovery remains and strategists have begun to raise their forecasts for GBP/EUR. We expect solid data figures to continue in November, however in order to witness some significant sterling momentum, economic data will have to provide some significant upside surprise.
Last month we saw a slight shift in the Bank of England’s stance, and although there were no policy adjustments the central bank highlighted that unemployment has improved marginally faster than forecasted. The monetary policy minutes from the last meeting noted that it was now possible that unemployment will be lower, and growth faster in the second half of the year, than predicted at the time of the August Inflation Report. This less dovish language may be what is needed to keep sterling competitive especially against the euro this month. If the central bank continues to display a more positive tone about the UK economy (especially unemployment), it could reignite speculation about when the BoE will consider raising rates. Next week the BoE’s monetary policy committee will meet and it is unlikely that we will see any change in policy. Eyes will then await the release of the monetary policy minutes to identify whether this rhetoric has continued into November.

GBP/EUR

Euro domination
There has been a big shift in momentum in the last month, and the demand we had seen for sterling has now moved to the euro. Euro strength has become a hot topic, and although the ECB have remained dovish, their lack of concern about euro momentum has given investors the green light to buy euros. In the press conference after the last ECB rate announcement, President Draghi highlighted the importance of the exchange rate to the eurozone recovery but didn’t signal any immediate concern about the single currency’s recent strength. It was only this week that ECB member Nowotny said he doesn’t see any tool the ECB could use against the strong euro, and it is something that we will just have to deal with. With comments like that it is no surprise investors are bullish on the euro, and this against bearish behaviour towards sterling set the tone last month. Investors have disregarded some more disappointing releases from the eurozone, and penalised sterling for some poor UK numbers. However, this week eurozone unemployment data was released and showed unemployment rose to 12.2% allowing sterling to rally through 1.17 and close at 1.18. Inflation is also becoming an increasing problem, and with CPI now at 0.7% y/y, the pressure is mounting for the ECB to take action, and possibly cut rates. This may be an indication that not everything can be ignored, and some euro weakness is in sight.

European banks are running out of excess capital and the ECB has said that there are a number of tools available in order to support banks, sparking talk of another round of LTROs. In an interview, governing council member Nowotny said that it is clear that there would be a liquidity provision but refrained from outlining what measures the ECB would use. As the month unfolds, there will be more focus on this, and if one is announced, it is likely to dampen recent euro strength and edge GBPEUR higher.

The ECB has scheduled a comprehensive assessment of 124 of the most significant Eurozone banks between November 2013 and October 2014. This includes a Supervisory risk assessment, asset quality review and stress test. It is possible that banks will begin to reduce the amount of foreign currency dominated assets held, to purchase euros in an effort to clean up their balance sheet. This could begin to influence the rate also.

GBP/USD

Is the storm over?
Neither currency in this pairing had it easy last month, however the problems just kept piling on for the dollar. After more than two weeks in partial shutdown, the US government managed to raise the debt ceiling in time to avoid default, but this was only raised till February 2014. Whilst this decision removed the immediate threat of default, it was by no means a solution, and this set the dollar up for weakness. The influence the shutdown had on the economy has also affected the Federal Reserve’s decision on whether to taper their asset purchases this year.

As we enter the new month the greenback is under a little less pressure than it was in October. This week the Federal Reserve kept interest rates and asset purchases on hold for another month, as expected. In the accompanying statement, the Fed seemed optimistic, but said more evidence is needed in order to pare back stimulus. The less dovish language provided the greenback with some momentum, edging the GBP/USD rate lower. Whether we can see this trend continue is dependent upon the performance of US figures. The shutdown has given the central bank more time to assess economic conditions, and as distorted data clears the way for more accurate releases, evidence should begin to build in favour of tapering.

The September employment report revealed 148k additional workers and a decline in the unemployment rate to 7.2%, the lowest level since November 2008. October’s payroll reading is expected to be show a modest increase, highlighting the slowing trend in payrolls. The market will pay particular attention to employment figures and any indication of an improving labour market will encourage more bullish behaviour, as well as increased speculation about the timing of tapering.

In the month ahead we feel the dollar will stabilise but will remain vulnerable to some weaker data releases. This may provide sterling with pockets of opportunity to push the GBPUSD rate higher but there is a fair possibility we could see this rate marginally trend downwards this month.

GBP/EUR: 1.1875
GBP/USD: 1.5920
EUR/USD: 1.3460

Sasha Nugent
Currency Analyst
Caxton FX

Caxton FX Weekly Report: Euro domination continues

The struggle continues for sterling
Not surprisingly, the pound found last week difficult against the euro. Despite beginning the week just above 1.18, trading in this pair was pretty uneventful and the euro managed to push the rate below 1.18. The challenge remains in the days ahead and with the sterling already struggling to maintain gains it is unlikely that this week will be any different. A light calendar will make it even more challenging and the only real significant piece of data being released is manufacturing production due to be published on Friday. The figure is expected to fall slightly below the last reading of 56.7 to 56.5 but another month in expansionary territory shouldn’t do the pound any harm. The likelihood that the GBPEUR rate will be able to breach 1.18 again look pretty slim this week, however any disappointment in eurozone numbers could encourage the rate a bit higher. The dollar may also attempt to reverse some losses this week although distorted data may prevent greenback from gaining much momentum.

A robust euro set to extend gains
The euro is still marching on against the dollar, continuing to fluctuate around the 1.38 level. Investors have maintained their bullish attitude towards the euro despite some softer data releases. Considering it will be a busy week for both the euro and dollar we may see more volatility and the door is still firmly open to see the euro continue to take advantage of greenback. The ECB seem unconcerned about recent euro strength and this is also encouraging the single currency’s momentum. How far the currency can go depends on how disappointing US data is this week. On sterling side of things it is pretty much the same story. Although the euro has managed to limit sterling gains, the currency is finding it much more difficult to build momentum against the pound than the dollar. Nevertheless, the ball is in the euro’s court this week and we could see this pressure building as the week unfolds.

The possibility of further dollar weakness remains
The dollar didn’t do too badly on Friday considering the kind of weakness it was subjected to during the week. There is a whole load of US data due and it is unlikely to do the currency any favours. The Federal Reserve is due to start their two-day meeting tomorrow, and is expected to see monetary policy remain on hold for another month. We doubt this result will encourage significant dollar weakness since most
investors have already priced this in, however disappointing data could encouraging the GBP/USD and EUR/USD rates higher. It will be a while until we see the dollar really regain control of things, and any upside surprise will almost certainly encourage a little more demand for the dollar. With limited UK releases, we expect greenback to hold up better against sterling, while greater downside risk remains against the euro.

End of week forecast

GBP / EUR	1.1670
GBP / USD	1.6260
EUR / USD	1.3900
GBP / AUD	1.6800

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

How far can the dollar go?

For the majority of trading today we have seen the dollar regain some control as US lawmakers have come closer to agreeing a debt deal. The dollar rally has pushed the EUR/USD rate back below 1.35 despite solid eurozone figures earlier today. The pound, however, has shown what it’s made of, and although a stronger dollar prevented a higher GBP/USD rate for the majority of the session, sterling seems to be making a decent comeback. Whether this can continue once the US government agreement has been announced is a different story, but for now, sterling has shown that it isn’t going down without a fight.

Sasha Nugent

Currency Analyst

Caxton FX

Caxton FX Weekly Report: Final Countdown for the US government

Sterling weakness continues as UK data shocks market
After sterling fell victim to a sell-off recently, last week’s manufacturing production figure surprised the market and gave investors another reason to get rid of some of their sterling holdings. Hopefully this week will be a better one for the pound with some significant releases due. Inflation figures will be released on Tuesday, and employment figures on Wednesday. If inflation meets the market’s expectation of 2.6%y/y, it will further justify the central bank’s position outlined in forward guidance. Employment figures will also be
watched carefully, and although no change in the unemployment rate is expected, lower claimant count figures will point to an improving economy. The last retail sales release disappointed, and this week we should see a much better number allowing sterling to make a decent comeback, to finish the week in a better position. It is likely that the euro will put up a fight, but provided UK figures can meet expectations, we should see the familiar upward trend return.

The Euro rides on
The euro has started this week still looking fairly robust, however the days ahead are looking more challenging for the single currency. ECB President Draghi has continued to shed a negative light on the progress of the eurozone, describing the recovery as fragile and uneven. Investors, as usual, seem to be drawing their own conclusions about the eurozone recovery as demand for the single currency remains fairly strong. This week sterling has ample opportunities to reverse the euro’s gains, although figures such as German ZEW Economic Sentiment may attempt to limit sterling’s potential. A number of ECB members have highlighted the problem of subdued inflation, and although the market is expecting an LTRO as the ECB’s next move, a less-than-forecast inflation figure would suggest a rate cut cannot be ruled out.
The US government has still failed to come to an agreement to lift the debt ceiling and although this continues to weigh on the dollar, some strong US figures this week will make it more difficult for the EUR/USD rate to reach 1.36 again.

A few days left, will the dollar default or overcome?
The deadline for the US government to raise the debt ceiling is fast approaching, with only four days to go. The markets may not be too worried just yet, however if an agreement is not reached soon we could begin to see the dollar re-emerge as a safe haven currency of choice. Until investors begin to park their funds in the dollar the greenback will be looking towards US data to provide the currency with some momentum. Considering US data has some catching up to do, it would be a good week for the little US releases we have to deliver some upside surprise. Until fears of a default really hit the market dollar weakness is likely to remain, with positive data only providing some short-term relief for the greenback.

End of week forecast

GBP / EUR	1.1825
GBP / USD	1.5925
EUR / USD	1.3575
GBP / AUD	1.6920

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

Caxton FX Weekly Report: Investors unwind sterling long positions

Investors profit-take as rate hike speculation eases
Sterling ended the week experiencing sharp declines as investors realise they may have gotten ahead of themselves on UK optimism. Bank of England Governor Mark Carney stated that the central bank will not consider “raising rates or tightening monetary policy until we see the conditions in the economy where the economy is really growing”. This, alongside economic figures that have come in below expectations, have highlighted the fact the UK still has a long way to go before the economy is perceived as “really growing”. The Bank of England is likely to maintain their dovish bias when they meet to discuss monetary policy this week, and we expect both the base rate and asset purchase programme to remain on hold for another month. After weeks of being the frontrunner sterling begins the week in a more vulnerable position and we doubt much is going to boost the GBP/EUR and GBP/USD rate back to the highs we have seen recently. Manufacturing Production figures could provide sterling with some support, however with a more euro-focused week sterling gains will be limited for a while yet.

Stellar performance from the euro, but can it continue?
The euro definitely made a strong comeback towards the end of last week, and with a more euro-focused week the single currency could possibly extend these gains further. Sentiment has improved towards the eurozone after Italian Prime Minister Letta won the confidence vote and ECB President Draghi stressed the bank’s commitment to use all policy tools available if the recovery falters. The central bank didn’t signal any concern about the current strength of the euro but did emphasize the exchange rate’s significance to the recovery of the euro area. President Draghi is due to speak on Wednesday and Thursday and it is unlikely that rhetoric will differ much from what we heard last week. German factory orders, industrial production figures and German trade balance will all be numbers to watch, and considering the ECB doesn’t view a strong euro as a threat just yet, we doubt investors will hesitate if data provides upside surprise.

How close will we get to a US default?
The dollar has suffered the consequences of a US government clash, and it will most likely get worse before it gets better for the currency. Last week we witnessed some good US economic figures provide the currency with some relief, but with the shutdown preventing the all-important US jobs release, there is only so much US data can do. The FOMC meeting minutes on Thursday will be of some interest, however with Fed tapering talk on hold for now it is unlikely to have a big influence with the partial shutdown still in place. Last week’s unemployment claims provided upside surprise and if this week follows suit it could support dollar weakness in the short term. For now the market is just playing the waiting game, and investors are not yet convinced the US government will risk a US default. As the days left to reach a decision diminish and risk aversion increases, we may see the dollar return as the safe haven once again. We believe the dollar could remain on the back foot for most of the week and don’t expect to see the risk aversion play for a few sessions yet.

End of week forecast

GBP / EUR	1.1850
GBP / USD	1.61
EUR / USD	1.3610
GBP / AUD	1.71

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