Bumper UK retail sales data provides some hope for sterling

Data this morning revealed that UK retail sales grew by a whopping 2.1% in February, which is an excellent result, particularly given the dire economic figures that have surfaced over Q1. This is the biggest monthly increase in three full years. Clearly plenty of this can be attributed to a natural recovery from a fairly empty high street in January as a result of the snowy weather. However, the strong showing can’t be entirely attributed to a bounce back and driving the growth in particular was strong demand for computer tablets, sporting goods and jewellery.

We can expect an overall improvement in UK retail sales over Q1 as a whole, which should enable the UK to avoid the dreaded triple-dip recession when the GDP data is released on April 25. In turn, this may well ensure that Mervyn King, Paul Fisher and David Miles remain the three doves voting in favour of QE at next month’s MPC meeting. That certainly doesn’t mean more won’t be convinced by May, which is an important Inflation Report month.

Yesterday’s UK Annual Budget provided a little bit of help for UK households in the form of a scrapped increase in fuel duty. However, real wages are still on a downtrend and UK inflation has also ticked higher lately, so we can be pretty confident that this morning’s UK retail sales won’t be replicated any time soon. Still though, good news is good news and sterling has benefited from it today. GBP/EUR is trading at €1.1750, only marginally lower than its highest level since Feb 10. Against the US dollar, sterling is trading close to the top of its one-month trading range, having just edged half a cent lower from $1.52.  

Richard Driver

Currency Analyst

Caxton FX

Sterling rallies on BoE's "no QE" decision

The Bank of England has today decided against adding to its asset purchase facility (quantitative easing programme), which remains at £375 billion. The result has been some further support for the pound, so cleary there were some lingering suspicions that the MPC doves would do enough to persuade a majority to vote in favour of QE. The BoE base rate also remains at 0.50%, though this was universally expected.

Despite disappointing updates from the UK services and manufacturing sectors in the past week, the MPC was always likely to hold fire on the issue of further QE this month. The UK GDP figure for Q3 would have firmed up several MPC members’ positions and from the comments emanating from the committee, several members doubt not only the need for further QE but the capacity of the measure to actually make a material impact. In addition the BoE thinks that the 2.0% inflation target will be hit regardless of more QE, due to persistently high inflation.

Whether or not the BoE will decide that further QE is necessary in the coming months really depends on whether the recovery that was indicated in Q3 materialises. QE should be seen as an emergency measure and UK data has revealed a slight uptrend of late, so it really wasn’t necessary in the absence of any fresh shockwaves. If the debt crisis or the eurozone downturn drags the UK back into a triple-dip recession then there is little doubt that the BoE will once again come to the rescue. As it stands though, its case of wait and see how this recovery progresses. 

Richard Driver

Currency Analyst

Caxton FX

Caxton FX Weekly Outlook: UK GDP needs to be firm

Sterling kept out in the cold despite host of strong UK figures

It was a good news week as far as the UK economy was concerned last week. We saw some more positive UK labour data; the unemployment rate dropped 7.9%, which is the lowest seen in over a year. Meanwhile, there were four thousand less jobless claimants; the improvements being seen in the domestic labour market are being sustained far beyond what many had expected.

UK retail sales data was also stronger than expected last week, while the public sector net borrowing figure also revealed that the government borrowed the least in the month of September since 2008. The chances are that Osborne will still miss his deficit-reduction targets but things appear not to be as bad as once feared.

Another development last week, which should have been positive for the pound, was a rather less dovish MPC minutes than expected. There appears to be a clear dovish voice within the MPC, led by David Miles, but there is no doubt that there are plenty in the nine-member committee who doubt that the UK economy needs a further dose of quantitative easing. Better still for the pound was the skepticism of some MPC members that more QE would actually be of any real practical benefit. Mervyn King speaks this evening and will perhaps provide some further clues. UK inflation has dropped to almost a three-year low, which is not exactly supportive of the pound but it was quite surprising to see the market ignore last week’s slew of genuinely upbeat economic figures. This week brings the long-awaited preliminary UK GDP figure for the third quarter; a showing of 0.6% is the consensus expectation, which should give the pound some belated support.

EU Summit hardly set the market on fire

It won’t come as much of a shock to learn that last week’s EU Summit yielded little by way of ground-breaking progress on the eurozone’s various debt issues. Merkel even said herself that this wasn’t a Summit where decisions would be made, rather it would pave the way for decisions to be made in December. Headlines focused around the banking union, which is expected to come into being at some point next year, but there was little to get excited about. Market nerves continue to ease though, as demonstrated by declines in Spanish bond yields, despite the fact that we remain in the dark with respect to the timing of bailout request from PM Rajoy.

There is plenty of eurozone growth data to keep an eye on this week, with investors possibly most concerned with conditions in Germany. A key gauge of the German business climate was surprisingly weak last time around and Wednesday morning should shed further light on this issue.

The euro has made a soft start to Tuesday’s session; Greece has stated that a deal must be reached on a €13.5bn package of cuts by Wednesday night, while Moody’s has downgraded five Spanish banks. This has helped sterling climb half a cent above its 5 ½ month lows of €1.2250. EUR/USD has also fallen to $1.30, which should see plenty of euro-buyers return in the short-term.

Sterling has lost grip of the $1.60 level this morning, a development we have anticipated for a while, though we have had to be patient. It now trades at a six week low of $1.5990 and direction from here all depends on what happens to the EUR/USD pair. Our base line scenario is for further losses for both pairs this week.  

End of week forecast

GBP / EUR	1.2325
GBP / USD	1.5975
EUR / USD	1.2950
GBP / AUD	1.5675
Richard Driver Currency Analyst Caxton FX

GBP/USD Outlook for Q4

US growth data pointed to a marked slowdown in Q3, which prompted the US Federal Reserve to finally deliver the long-awaited QE3 in mid-September. This has helped to keep the dollar on the back foot for much of the last month. The prospect of another round of QE to boost the world’s largest economy allowed US and European equities to maintain their summer momentum, never an environment conducive to dollar-strength.

The ECB’s pledge to purchase unlimited quantities of distressed debt (particularly Spain’s) and the Germany Constitutional Court’s approval of the European Stability Mechanism, which has been launched this week, also eased market worries and weakened demand for the safe-haven US dollar. This all coincided with a solid upturn in UK data; growth in August particularly picked up around the Olympics and GDP data for Q2 was revised up to an improved -0.4%.

However, some poor UK growth figures in the past week from the manufacturing and services sector in particular have taken the edge off the GBP/USD rate. Investors are once again stepping up their bets that the BoE will decide in favour of further QE in its closely watched November meeting. Much will depend on the initial UK GDP for Q3, which is released on October 25. The NIESR’s estimate this week of 0.8% growth may be a little too punchy.

Eurozone frustrations are now creeping into some dollar-strength. Spain is dragging its heels on requesting a bailout, while there remains uncertainty surrounding whether or not Greece will receive its next bailout tranche and whether we will see another Greek debt restructuring. In addition, we have seen plenty of evidence that not only is the eurozone heading into a recession, but that Germany could well be unable to resist this downward spiral. Some distinctly gloomy growth forecasts for the global economy from the IMF have also weighed heavily on market sentiment this week.

The combination of renewed weakness in UK data and renewed eurozone concerns saw the GBP/USD pair top out at $1.63 last month. This level represented a one-year high and GBP/USD’s resounding failure to breach this benchmark has resulted in a fairly sharp decline to $1.60, where it is currently finding support.

We expect the dollar to maintain the ascendancy in the fourth quarter, which should force the GBP/USD rate to make a sustained move below the $1.60 level in the short-term. Beyond this, we see the rate closer to $1.55 by the end of the year. There is plenty on the horizon to be nervous about; the US election and fiscal cliff, Spain (including probable credit rating cuts), Greece and global growth, which should all filter into a stronger US dollar. This baseline scenario of a lower GBP/USD rate relies on a decline in the EUR/USD rate and a continued loss of momentum in global equities, both of which we are sticking to. One major caveat to this positive outlook for the USD is that at some point in the coming weeks, Spain looks likely to bite the bullet and request help, which will likely give the euro a temporary lift and hurt the USD. 

Richard Driver

Currency Analyst

Caxton FX

Sterling struggles as UK growth runs out of steam at end of Q3

After an excellent few weeks in which UK figures repeatedly beat expectations to the upside, this week’s figure reveal that UK growth slowed up in September, which represents a disappointing conclusion to the third quarter. All three of the monthly updates from the UK manufacturing, construction and services sectors came in softer than consensus expectations, which is likely to bring the UK government firmly back down to earth.

The Chief Economist of Markit, the company which compiles the PMI data that we are talking about, has suggested today that UK GDP will only grow by 0.1% in the third quarter, which is well below our and the market’s expectations. Before this week, we were roughly in line with consensus expectations of a GDP showing of 0.6%. Clearly this week’s figures cannot be ignored but a downward revision to 0.1% is a little too drastic for us. We are still anticipating growth close to the 0.5% mark. The August Inflation Report from the BoE, which anticipated growth of as much as 1.0% in Q3, is likely to be well wide of the mark.

Although today’s services data suggests that the steady and impressive improvements we have been seeing in the UK labour market may be coming to an end, the order books are at least looking pretty healthy. Still, the figures do firmly indicate that the strength in the UK economy seen in August was down to temporary Olympics-related demand. Underlying growth appears to be significantly weaker.

Many market players will naturally respond by speculating that the Bank of England will react with another round of QE. Thursday will not produce a QE decision, though November’s BoE meeting is likely garner far more debate from within the MPC. Much will depend on the Q3 preliminary GDP reading at the end of the month.

Richard Driver

Currency Analyst

Caxton FX

UK Q2 GDP contracts by less than expected: things are looking up

The final UK GDP figure has been announced this morning and the news was very good; the UK economy only contracted by 0.4%, less than than the previous -0.5% estimate and considerably less than the original -0.7% reading. So in simple terms, the UK economy was only around half as bad as first thought in Q2. An upward revision to the construction sector’s performance is a key cause of the upward revision.

The Bank of England reckons that the extra bank holiday for the Queen’s Jubilee in June cost the UK economy as much as 0.5%, so underlying growth could actually have been positive in Q2. There is a big difference between stalling growth and deepening recession. Today’s upward revision really dovetails with what Mervyn King has been saying for the last few months. The figures released by the Office of National Statistics (the GDP figures) have underestimated UK growth, or at least overestimated the impact of the Jubilee bank holiday.

UK figures have been showing some significant improvements this summer, helped by the Olympics, and MPC member Fisher has commented today that we can expect a “very strong” GDP reading for Q3. In fact, we are expecting Q3 growth to more than make up for Q2’s contraction, perhaps showing a reading as high as 0.7%.

Of course, downside risks should be noted and the UK is a long way from being out of the woods and free from recession fears. The eurozone debt crisis continues to pose a threat to our banking system and it is certain that eurozone growth will be more or less non-existent next year. Nonetheless, this morning’s figure is good news and October 26 will bring more in the form of a robust preliminary Q3 GDP reading. All good news for the pound, which has already enjoyed a rally today, trading above €1.26 and $1.62. 

Richard Driver

Currency Analyst

Caxton FX

UK trade deficit narrows to an 18-month low

Trade balance data for July has revealed this morning that the UK trade deficit has narrowed to a February 2011 low of 7.1B. This was lower than the 8.9B deficit that was anticipated and significantly lower than the 10.1B deficit shown in August. 

At 9.0%, overall export sales growth was at its highest level since 1998. Sales of goods outside the eurozone grew by 11%, while somewhat surprisingly, sale of goods to the eurozone even grew by almost 8.0%. More positive news for the economy, then, and it certainly takes some of the considerable pressure off the UK government.

It is encouraging to see UK businesses respond to the challenges facing them, in the form of low confidence and deteriorating economic conditions in the eurozone, by diversifying their global trade relations. Increased take-up from the US, Asia (especially India) and South Africa all contributed to this morning’s improved figure. Oil exports to the eurozone was also a key factor in helping the July trade balance bounce back from June’s disappointing showing, which was the worst since modern records began 15 years ago.

Once again this points to a rebound for UK GDP in the third quarter. Awful trade balance figures were a real drag on growth last quarter, which unless we see another dramatic reversal in August and September, will not be the case in Q3. It goes without saying that this figure does not change a very uncertain outlook for UK exporters. The flow of bad news out of the eurozone has been stemmed somewhat over the summer but for as long as the region’s economy contracts, a cloud will remain over many UK businesses. Nonetheless, this is again good news for the UK and no doubt Chancellor George Osborne will sleep a little easier tonight.

Richard Driver

Currency Analyst

Caxton FX

UK growth shows signs of bouncing back in August

In light of the early release of the UK services sector PMI figure, we now have a good picture of how the UK economy performed in August. After an awful slump in July to kick off the second half of the year, conditions in the UK clearly picked up in August.

UK construction remains in the doldrums, contracting in August for only the second time in twenty months. However, UK manufacturing growth was nowhere near as bad as expected, only marginally contracting compared to the rapid slowdown that was anticipated. Once again, the UK services sector appears to have bailed the UK economy out, showing some truly impressive growth – the best in five months.

This really suggests that the Bank of England’s prediction that the UK economy could bounce back in Q3 could be spot on. Still, declines being seen in the UK construction sector will remain a grave concern because while it is a relatively small segment of the economy, it has proven this year that it can weigh materially on GDP figures.

The upturn in the UK economy in the past month could well be Olympics-related, so the market will be right not to get ahead of itself. It certainly does not remove the possibility of the BoE deciding on further QE later this year. What it probably does do is put to bed any hopes or expectations that the BoE will do any further monetary easing on Thursday. More evidence will be needed if we are to have any confidence that we will see a sustained bounce back for UK GDP, but this is some rare good news from the domestic economy. Sterling has benefited accordingly as well, climbing half a cent today against the euro to reach €1.2650. 

Richard Driver

Currency Analyst

Caxton FX