Euro still rallying but for how long?

Euro recovers from S&P with a major bounce

The euro has responded impressively to Standard & Poor’s blanket downgrade of nine eurozone credit ratings (which wouldn’t have been the case had Germany been axed). The market is extremely short of euros and what we are seeing is those short positions being covered, particularly as hopes are raised for a Greek deal on private sector creditors. Whether or not a deal emerges remains to be seen, 60-70% haircuts have been rumoured but until there is an official announcement, the market remains completely in the dark. Unsurprisingly, a deal was not reached on Monday as was hoped and it looks like we may have to wait another few weeks for progress.

The euro has benefited from some remarkably positive eurozone bond auctions of late; the impact of the ECB’s cheap loan offering in evidence once again. Spain in particular saw terrific demand and yields also eased. On the data front, there was a staggeringly strong German economic sentiment survey which contributed to the euro’s best week in months. The IMF joined the party on Wednesday, with reports suggesting that it would be making a further $1 trillion available to the eurozone. This, predictably, was later revised down to “several billion dollars.”
So, there have been some genuine developments for the euro in the past week or so - S&P’s downgrade aside - but beyond the short-term, not enough to sustain further gains or even maintain current levels from our point of view.
Sterling struggling ahead of UK GDP and MPC minutes

Wednesday’s session is an important one as far as sterling is concerned. We will see the preliminary UK GDP figure for the final quarter of 2011, which is expected to show a marginal (0.1%) contraction. The minutes from the MPC’s last meeting a fortnight ago will also be watched closely for clues as to whether the Bank of England’s quantitative easing programme will be stepped up again in early February. Our bet is that it will but downside risks for sterling should be fairly limited on this front, with the market having priced it in to a large extent. The UK GDP figure could well have a material impact on the sterling exchange rates if it undershoots already pessimistic expectations.

UK unemployment numbers reached fresh highs last week and UK inflation declined aggressively, neither of which are positives for the pound. On a brighter note, UK retail sales picked up a little in December, which was to be expected in light of November’s appalling showing.

The euro is trading strongly this morning on the back of some positive manufacturing and services PMI data. There have also been some positive political developments this week; Germany has stated it is open to increasing the firepower of the eurozone bailout fund and there has been progress on details relating to the permanent bailout fund – the European Stability Mechanism (to be introduced later this year). The euro should be able to hang onto most of its recent gains, though further climbs look a push. With GBP/USD at $1.56 and EUR/USD at $1.3050, the dollar looks ripe for a recovery soon. At the end of the week, we are likely to learn the US economy grew impressively in the last quarter of 2011, which should improve the prospects for the US dollar regardless of any boost to risk appetite that it may trigger.
 
End of week forecast

GBP / EUR 1.20
GBP / USD 1.55
EUR / USD 1.2950
GBP / AUD 1.49

Richard Driver
Analyst – Caxton FX

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Richard Driver, Analyst Eurozone finance ministers rejected the private bondholders’ offer yesterday and asked them to consider a sub-4% yield on new bonds. There was no euro sell-off though, as there was reason for hope thanks to a statement from Germany indicating that it is now open to boosting the firepower of the eurozone’s rescue funds.   We have seen a raft of eurozone PMI data this morning, which has actually been broadly positive.  Today’s session has brought some positive public sector net borrowing data from the UK but pairings are no doubt going to be driven by headlines from Europe.
STERLING/EURO: A deal regarding the deployment of the permanent bailout fund was reached yesterday, which offered the euro a little support. There was positive news for the euro that the European Stability Mechanism will be able to provide emergency loans, provided they have the backing of 85% of eurozone government under qualified majority voting. There was a slightly more concerning headline that investors fear Portugal will require a second bailout at some point. Sterling is trading at a weak looking €1.1920 this morning, with the euro having been helped by some positive German and eurozone-wide manufacturing and services data.	FORECAST
STERLING/US DOLLAR: This pair traded within a very tight range yesterday, having been rejected at the $1.56 level. Sterling has climbed by almost three cents in the past week or so but is meeting some fairly stiff resistance at these levels. These are strong levels at which to sell sterling and buy USD, particularly given the uncertain outlook in the eurozone and UK economies, as opposed to the upturn we are seeing in the US. Sterling is trading at $1.5550 and it would be no surprise to see some further sideways trading as investors hold off ahead of tomorrow night’s Fed statement.	FORECAST
EURO/US DOLLAR: Strong data and optimism surrounding future emergency funds in the eurozone outweighed the absence of Greek PSI deal.   The German services sector ticked up impressively last month and its construction sector bounced out of negative territory as well. The services sector of the eurozone as a whole followed suit and also moved back into positive growth, though its manufacturing sector contracted marginally. The figures have understandably been taken as a positive, particularly amid all the talk of a eurozone recession. There is a sense that eurozone finance ministers are getting somewhere in dealing with the debt crisis moving forward (via the ESM), and the possibility that Germany will allow the fund to be expanded is a real positive. This pair is thus trading up at $1.3050.	FORECAST
STERLING/AUSTRALIAN DOLLAR: The aussie dollar is weakening ahead of what is likely to be some weak Australian inflation data. Australian inflation data is likely to reveal slowing price pressures for the fourth consecutive month. If the data this evening is weak, the arguments for another Reserve Bank of Australia rate cut will be strengthened once again. Asian stocks also spent their fourth day in the green out of five, which boosted demand for the aussie. Sterling is trading at 1.4850 this morning and it looks as if we may see a bit of a bounce in this pair today.	FORECAST
STERLING/NEW ZEALAND DOLLAR: Sterling is trading a little higher today, with European markets responding cautiously to the overnight Greek news. We have not seen data from New Zealand yet this week, but we have some credit card spending, manufacturing and trade balance data to look forward to in the coming week. Also important for the kiwi dollar this week will be news from the US economy; the Fed is meeting over the next two days and will be giving a statement tomorrow night, and the US GDP figure comes on Friday. There is plenty of potential positivity as far as risk is concerned here. Nonetheless, sterling is finding some favour this morning amid a decline in European stocks, as investors search for safety.	FORECAST
STERLING/CANADIAN DOLLAR: Canadian data and US stocks were positive yesterday afternoon, though Canadian retail sales figures may be weaker today. This pair traded sideways yesterday, as the markets lay in wait for news regarding Greece’s PSI negotiations. It is certainly a disappointment that nothing concrete emerged last night and it has been indicated that a deal can be expected before Feb 13th, though we don’t have to remind you how many times we have been left wanting before. US stocks have benefited from an impressive recovery in recent sessions, which is really fuelling the loonie. This pair is trading at the low level of 1.57 this morning.	FORECAST
This post is prepared by Caxton FX Ltd for information purposes only and may contain personal views that are not the opinion of the company. This is not an offer to purchase or sell any security or an investment advertisement. Caxton FX Ltd is authorised and regulated by the Financial Services Authority, although foreign exchange transactions with Caxton FX are regulated by HM Revenue and Customs. This email does not constitute advice for any foreign exchange transaction, nor is it intended as a solicitation for funds or recommendation to trade.

Richard Driver, Analyst The weekend ushered in some more negative eurozone headlines, to take some of the edge off what was still a very strong weak for the euro. German finance minister Schauble reminded us of the constant lack of political consensus in Europe, by rejecting the notion of an expanded European Stability Mechanism (permanent bailout fund). There are also signs that Greek negotiations are failing to progress. The focus for sterling this week is Wednesday’s UK GDP figure but the market will have to look outside of data releases for inspiration today, with very little scheduled. Rumours out of the Greek negotiations will dominate traders’ thinking.
STERLING/EURO: Sterling is trading a cent higher as the euro’s rally runs out of steam; Greece still threatening to upset confidence. UK retail sales grew by 0.6% in December, which was in line with expectations. External events are driving sterling to a greater extent that domestic data though, and Greek concerns are weighing on the euro at present. Private sector bondholders are reported to have submitted their “maximum” offer in terms of the write-downs they are willing to accept. With negotiations seemingly on a knife-edge, the market will be nervous today. Sterling is trading at €1.20 this morning and we are waiting for this pair to post fresh multi-month highs above €1.2150.	FORECAST
STERLING/US DOLLAR: Tracking EUR/USD’s gains, sterling had an excellent week against the US dollar, but further upside may be limited. This pair has climbed well of its lows below $1.53, though we are not giving up on expectations of a move much lower further down the line. Sterling looks hard-pushed to gain much further ground above $1.56 with so many risk factors remaining on the table, both in the eurozone and here in the UK. On Wednesday we should gain a better idea of whether the BoE will increase its QE programme. This issue has not weighed on sterling hugely in recent months but could peg it back a little. Sterling is trading at $1.55 this morning and should meet plenty of resistance at these levels, especially with the Greek situation so fragile.	FORECAST
EURO/US DOLLAR: This pair did superbly last week as short-covering took effect; short-term direction will be dictated by Greek news. The dollar had a tough time of it last week, as the market took the approach of “sell the rumour, buy the fact.” Investors sold the euro on the previous Friday amid the rumours of a French debt downgrade from Standard & Poor’s, then throughout last week the euro was bought regardless, particularly as the downgrades moves were broadly expected (and apparently priced in). The euro is trading up towards $1.2950 this morning and it would be a surprise to see this pair make significant inroads into the $1.30’s.	FORECAST
STERLING/AUSTRALIAN DOLLAR: The aussie dollar is back on the front foot this morning, despite easing producer price pressures. The case for another Reserve Bank of Australia interest rate cut was strengthened again last night, with data showing declining produced prices. Regardless of this downside factor for the Australian dollar, it is still trading very strongly. In fact, the aussie is trading close to a three-month high against its sixteen major counterparts. Sterling is trading down below 1.48 again this morning, though sterling may find some favour if Greek news is negative today.	FORECAST
STERLING/NEW ZEALAND DOLLAR: Sterling continues to trade poorly against the kiwi dollar, ahead of Thursday’s Reserve Bank of New Zealand interest rate decision.   The improved growth stories in the US and China are helping the kiwi dollar at present. Final quarter US GDP is due out on Friday, so there could well be further good news for the kiwi in the short-term. However, it remains vulnerable to news from Greece, though admittedly not as much as in the past. Sterling is trading at 1.92 and is looking slightly vulnerable against riskier currencies at present.	FORECAST
STERLING/CANADIAN DOLLAR: Sterling is trading a little higher against the loonie as Canadian inflation eases significantly. Canadian inflation eased aggressively in December, which of course weighs on the outlook for a Canadian interest rate rise. Still driving appetite for the Canadian dollar is the upturn in US growth and this is likely to benefit the loonie moving forward. Sterling is trading at 1.57 this morning and risk appetite really depends on Greek negotiations today.	FORECAST
This post is prepared by Caxton FX Ltd for information purposes only and may contain personal views that are not the opinion of the company. This is not an offer to purchase or sell any security or an investment advertisement. Caxton FX Ltd is authorised and regulated by the Financial Services Authority, although foreign exchange transactions with Caxton FX are regulated by HM Revenue and Customs. This email does not constitute advice for any foreign exchange transaction, nor is it intended as a solicitation for funds or recommendation to trade.

Morning Report

Richard Driver, Analyst It has been a remarkably good week for the euro, which has benefited from solid bond auctions in the eurozone and some potentially positive developments such as increased IMF funding. Hopes of a deal between Greece and private bondholders are continuing to build, which again is supporting the euro. Today’s calendar brings the monthly UK retail sector growth figure, which is expected to bounce back after last month’s disappointing contraction. Elsewhere, data is extremely thin and the markets will look to rumours on a Greek deal.
STERLING/EURO:Sterling lost further ground against the euro, but our longer-term euro-negative outlook remains unchanged. The euro’s strong week can be put down to short-covering, which isn’t too surprising given its sharp decline of late. Positive results at bond auctions in Spain and France fuelled the euro’s rally. With such decent demand for eurozone debt this week, it appears that the market has not taken too much notice of S&P’s recent blanket credit downgrade. The Greek private sector involvement (PSI) negotiations are the prime focus of the market now. Rumours have emerged that they are closing in on a short-term deal, which would almost certainly see this euro rally built upon. However, as always with EU politicians, there remains a very significant chance of a collapse in negotiations, which would drag the euro down with it. This pair trades at €1.1950 for now.	FORECAST
STERLING/US DOLLAR:Sterling is tracking the euro’s gains against the US dollar, helped by some rare poor US economic data. US data disappointed yesterday, which is a rare occurrence based on the last few weeks. The Philly Fed manufacturing index failed to meet expectations of another monthly expansion, though this will do little change the optimism surrounding the world’s largest economy and its manufacturing recovery. Sterling has climbed by two cents against the US dollar this week and is currently trading at $1.55, which represents a good rate to buy dollars as far as we are concerned. UK retail sales data is the focus for sterling today.	FORECAST
EURO/US DOLLAR:The euro is set for its strongest weekly gain since October and there could be some further upside in the short-term. The euro has bounced impressively from its seventeen month low of $1.2625. This short-covering rally still has some more legs in it, but we should see this pair test lower levels further down the line. Much onus is being placed on the Greek negotiations at the moment but success on this issue will not by itself save Greece; its debt will remain unsustainably high. This pair is trading at $1.2950 and it would be no surprise see this pair jump up above the $1.30 level in the short-term.	FORECAST
STERLING/AUSTRALIAN DOLLAR: Sterling has bounced up off its record lows against the aussie dollar, with the Chinese manufacturing sector remaining in contraction. Chinese manufacturing growth was flat last month, which does little to change the slightly negative outlook for Chinese growth. China looks like it may be able to pull off a ‘soft landing’ for its declining growth, but it still means demand for aussie exports will be lower moving forward. Australian PM Gillard stated yesterday that there is room for the Reserve Bank of Australia to cut its 4.25% interest rate, particularly in light of poor aussie employment figures on Thursday morning. This pair is trading up towards 1.49.	FORECAST
STERLING/NEW ZEALAND DOLLAR: Sterling is building on its recent recovery against the kiwi dollar, aided by weak NZ inflation data. Wednesday night’s kiwi inflation data has hurt the New Zealand dollar and seen it erase some of its recent gains. With inflation actually dipping into negative territory for the first time in nine months, bets on an RBNZ rate hike will have been pushed back considerably, possibly to next year. The kiwi has done well amid euro-weakness of late, so it is understandable that will the euro strengthening some of these kiwi gains have been reversed. This pair is trading up above 1.93.	FORECAST
STERLING/CANADIAN DOLLAR: Sterling is recovering against the loonie, with Canadian inflation likely to weigh on the loonie today. US manufacturing data was poor yesterday, though US stocks spent their third consecutive session in the green. Still, the domestic picture could weigh on the Canadian dollar today with inflation likely to ease and push a Bank of Canada interest rate hike even further into the future. This pair is trading back up at 1.57 and sterling should be able to continue climbing against the loonie today, though it remains at the very bottom of its long-term trading range.	FORECAST
This post is prepared by Caxton FX Ltd for information purposes only and may contain personal views that are not the opinion of the company. This is not an offer to purchase or sell any security or an investment advertisement. Caxton FX Ltd is authorised and regulated by the Financial Services Authority, although foreign exchange transactions with Caxton FX are regulated by HM Revenue and Customs. This email does not constitute advice for any foreign exchange transaction, nor is it intended as a solicitation for funds or recommendation to trade.

Morning Report

Richard Driver, Analyst The euro extended its gains yesterday, despite an initial sell-off when the US came on-line, as the IMF announced it is seeking to almost double its war-chest by raising $600 billion to help protect the global economy against a worsening European debt crisis. European stocks are up this morning despite threats of a roadblock by the US and other countries. Today sees bond auctions from Spain and France (the first since its AAA downgrade by Standard & Poor). Direction will be dictated on the results of these, but with debt-sales so far going without too much of a problem since the sweeping AAA downgrades, investors will be reluctant to bet against them.
STERLING/EURO: The single currency continues to extend its gains this morning, with developments in Greece and French and Spanish bond auctions eyed. The euro has had a positive week thus far, with news yesterday bolstering support for the euro as the IMF said it is prepared to double its war chest to help contain the debt crisis. This could be de-railed however, as the US declared its position that Europe has the capacity to solve its own problems, and should put up more of its own money. Investors will eye today’s bond auctions as a signal of confidence in the euro-zone, and if the previous bond auctions are anything to go by, we could see a positive turn out, with the euro benefitting.	FORECAST
STERLING/US DOLLAR: Sterling rose against the US dollar yesterday, gaining almost a cent as risk appetite improved. The US dollar came under selling pressure yesterday as stronger risk appetite undermined the dollar’s safe haven appeal. Sterling gained ground as optimism about Greek debt talks and the International Monetary Fund’s intention to increase its lending capacity boosted risk appetite.Sterling remains well supported against the US dollar this morning as signs that the US economy is improving are continuing to bolster risk appetite. Further indications of the health of the US economy could be revealed this afternoon, when US unemployment, housing and manufacturing figures are released in the States.	FORECAST
EURO/US DOLLAR: The euro continues to hold steady above the 1.2850 mark as investors target bond auction results. Global risk appetite has returned somewhat, with the IMF announcement and expectations that Greece will reach a deal with its bondholders. Investors will be reluctant to sell the euro further before the results of French and Spanish bond auctions results are announced, so we should see this pair holding firm before the announcement later on today. Direction will also be determined on noises coming out of Greek talks. Any breakdown in talks, or talk of a default will harm the euro and see investors once again clambering for the safe-haven dollar.	FORECAST
STERLING/AUSTRALIAN DOLLAR: The Australian dollar weakened for the first time in three days after a government report showed employers unexpectedly reduced payrolls.   Australian employment suffered a surprise fall for the second straight month of decline, after data showed that employment fell by 29,300 in December, against market expectations for a rise of 10,000. This caused the aussie to weaken against all of its 16 major counterparts and it is now trading at 1.4840. Labour market weakness could shore up expectations for a third rate cut at the Reserve Bank of Australia’s Feb 7th Policy meeting.	FORECAST
STERLING/NEW ZEALAND DOLLAR: The Kiwi dollar fell from an 11-week high after a government report showed consumer prices declined. New Zealand’s annual inflation unexpectedly fell last month as food prices dropped 2.2 percent, providing the central bank with room to keep interest rates at a record low to combat the global issues that threaten to stop the recovery of New Zealand’s economy. The consumer price index data released last night showed CPI fell 0.3 percent in the three months after a forecasted rise of 0.4 percent; this was the first decline in two years. This pairing is trading at 1.9270 this morning.	FORECAST
STERLING/CANADIAN DOLLAR: With the return of global risk appetite and a strong US economy the Loonie is holding up well against the pound. Canadian manufacturing data this afternoon will be eyed in an otherwise quiet day in terms of economic announcements. The Loonie will likely keep its gains today in what has turned out to be a poor week for sterling.	FORECAST
This post is prepared by Caxton FX Ltd for information purposes only and may contain personal views that are not the opinion of the company. This is not an offer to purchase or sell any security or an investment advertisement. Caxton FX Ltd is authorised and regulated by the Financial Services Authority, although foreign exchange transactions with Caxton FX are regulated by HM Revenue and Customs. This email does not constitute advice for any foreign exchange transaction, nor is it intended as a solicitation for funds or recommendation to trade.

UK unemployment data poor, improvements are badly needed

Data today revealed that the UK unemployment rate has risen to 8.4%. Fewer jobless claimants emerged than expected, with only 1,200 claiming as opposed to  the 9,100 expected. This is scant consolation however, UK unemployment is at its worst level in seventeen years. So, what can the UK government do about it?

There are many measures than can and should be taken to address the UK’s chronic unemployment situation. Most obviously, the Bank of England should ramp up its quantitative easing programme, particularly with inflation likely to ease this year. This should hopefully increase bank lending and enable the private sector, specifically SME’s to pick up the slack that the public spending cuts are leaving in the job market.

We need to make the UK a more hospitable environment for employers, which means lowering and simplifying taxation and cutting out over-regulation, though the government’s hands are tied to large extent by EU law.

For the longer-term, youth unemployment needs to be looked at, which means improving the UK’s education system. It is widely accepted that we need to equip young people with the skills, training and experience that will make them essential to UK businesses moving forward.

Investment in infrastructure is another major opportunity, whether this is funded by cheap UK borrowing in the debt markets or preferably by attracting foreign investment; relations with China are building in particular. There could be huge job creation if projects in sectors such as energy and transport (e.g. high speed rail) could be initiated. House building was the driver of job-creation in the recovery from the Great Depression in the 1930's and this could be replicated; housing in London in particular is a real problem.

Unfortunately, the fate of the UK’s unemployed could well be out of domestic hands – so much depends on events in the eurozone. The risks of a financial collapse and European recession are growing every month. No amount of bold and creative measures to boost UK employment will be successful if the worst case scenario comes to fruition in the eurozone.

Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.

Morning report

Richard Driver, Analyst Tuesday was another more positive day for the euro in light of a far better than expected German sentiment survey and a positive Spanish bond auction. Portugal will be hoping for the same level of success in its bond sale today, though it may be found wanting. Today’s session brings the monthly update from the UK labour market; some mild improvements are expected but the situation remains distinctly gloomy. Elsewhere, nerves over Greece continue to ramp up.
STERLING/EURO: The euro found some favour after a staggering German sentiment survey, but Greek fears limited gains. A gauge of German economic sentiment improved at a record pace, which is astonishing given the diminishing confidence levels in the eurozone as a result of the debt crisis. A solid Spanish bond auction added to the improved sentiment. Portugal will be hoping the improved liquidity helped by the ECB’s cheap loan scheme will boost demand and keep yields down at an auction today. UK headline inflation came down sharply yesterday from 4.8% to 4.2%, the Bank of England has been forecasting a decline this year and this appears to be coming to fruition. Temporary factors such as VAT and high oil prices will drop out of the equation soon, which should bring UK inflation back down to the official 2.0% target. Consumers will be grateful but the pound does not stand to benefit, further QE becomes even more nailed on amid easing price pressures. This pair trades at €1.20.	FORECAST
STERLING/US DOLLAR: This pair traded sideways despite some very positive US manufacturing data, sterling gains look capped at $1.54. The Empire State manufacturing index climbed to a nine-month high yesterday, and we are expecting further strong data in the form of some industrial production data. Sterling is finding it tricky to bounce against the US dollar as the spectre of further quantitative easing looms next month. Sterling is trading at $1.5350 this morning, and we could see it test lower levels today.	FORECAST
EURO/US DOLLAR: This pair has made a couple of attempts at $1.28 but has failed to breach this resistance level, increasing Greece talks may weigh on the euro.   Fitch’s Ratings has chimed in with comments to the effect that Greece will default in late March. This fear will be a major driver over the next two months and should put the euro under a great deal of pressure. It is no secret that Greek bond restructuring talks are stalling badly. This pair has come well off its highs to settle around the $1.2750 this morning, we are looking for levels in both the shorter and longer-term.	FORECAST
STERLING/AUSTRALIAN DOLLAR: Sterling stooped to a 27-year low against the Australian dollar as UK QE expectations increase.   The two Reserve Bank of Australia interest rate cuts seem to have had a positive impact at consumer level, with a gauge of sentiment bouncing back from contraction last month. Low inflation firmed the view that the BoE will pump more money in to the UK economy, which is nearly always a negative for a currency. This pair is at record-low levels against the aussie dollar, but has at least bounced off lows towards 1.47, trading almost a cent higher this morning. This evening brings some important aussie inflation data, which could help determine the likelihood of another RBA rate cut.	FORECAST
STERLING/NEW ZEALAND DOLLAR: This pair continued its downtrend towards 1.90, but the risks off a pullback in the kiwi dollar are rising all the time. The kiwi dollar remains very much in favour, taking its lead from strong gains in Asian stocks for the past two sessions. Much depends on the ongoing Greek talks, hopes appear to be growing that a deal will emerge very soon, but we have been disappointed too many times to have much confidence in this. The kiwi dollar is looking pretty overextended and a retracement looks likely before long. In the short-term, eyes will be on Portugal’s bond sale today. It could well struggle to curry the same favour as Spain did yesterday.	FORECAST
STERLING/CANADIAN DOLLAR: Sterling traded sideways against the Canadian dollar yesterday, despite gains in US stocks and strong US growth data. The Bank of Canada met expectations yesterday by holding interest rates at 1.00% for the eleventh consecutive month. Global uncertainties are only going one way at the moment, so there was no chance of a rate hike. The Bank of Canada estimated that Canada’s economy grew by 2.4% last year, which is very healthy in the current environment. US data followed the positive trend yesterday, but the loonie will meet increasing resistance at these very strong levels against sterling. For now, this pair trades close to 1.56.	FORECAST
This post is prepared by Caxton FX Ltd for information purposes only and may contain personal views that are not the opinion of the company. This is not an offer to purchase or sell any security or an investment advertisement. Caxton FX Ltd is authorised and regulated by the Financial Services Authority, although foreign exchange transactions with Caxton FX are regulated by HM Revenue and Customs. This email does not constitute advice for any foreign exchange transaction, nor is it intended as a solicitation for funds or recommendation to trade.

Richard Driver, Analyst The currency markets were relatively calm yesterday, despite Standard & Poor’s downgrade to the European Financial Stability Fund by one notch. Focus was directed at last night’s Chinese GDP figure, which turned out to be positive and gave market confidence a much-needed kick. Today’s session brings the monthly UK inflation update, which is expected to show a sharp easing in price pressures. Whilst consumers will be relieved, this won’t be particularly positive for sterling.
STERLING/EURO: The euro benefited from a minor bounce overnight, regardless of downgraded bailout fund. Given that it is no longer backed by AAA-rated member-states (by S&P at least), it is little surprise to see S&P remove the bailout fund’s top rating. From the eurozone, we have a very important German economic sentiment survey, which is expected to be poor and could well weigh on the euro this morning. Later on this week there are further bond auctions from Spain and France, which should reveal what impact the recent debt downgrades will have on the eurozone’s struggling countries. For now this pair is trading at 1.2050.	FORECAST
STERLING/US DOLLAR: A bounce in the euro/dollar pair gave sterling a little upside against the greenback. Yesterday was a weaker session for the US dollar but this does nothing to change our bright outlook for the US dollar. The good news from China gave risk appetite a nudge in the right direction but it seems highly likely that Standard & Poor’s actions will have a lasting effect on confidence, which should see the dollar remain in favour. This pair is trading at $1.5370, but a move much higher is unlikely with the next negative headline seemingly just around the corner.	FORECAST
EURO/US DOLLAR: The euro brushed off another debt downgrade on Monday, as traders tried to put the weekend’s news behind them. These small retracements of the euro’s losses will not worry those betting on further dollar-gains; this pair’s downtrend remains very much intact. We will see what eurozone inflation has done in the last month later this morning, no change is actually expected but risks are towards a lower figure which might make ECB quantitative easing a more palatable idea to the Germans. Today’s session brings some manufacturing data from the US, which is expected to show a further uptick and could benefit the US dollar today. For now, this pair trades a little higher at $1.2750.	FORECAST
STERLING/AUSTRALIAN DOLLAR: A surprisingly strong Chinese GDP figure saw the aussie dollar push on even further. This pair has declined by more than eight cents in the past month, and the latest boost was given by a Chinese GDP figure that beat expectations to the upside. After last quarter’s figure of 9.1%, a showing of 8.7% was anticipated, but the market was relieved to see 8.9% growth. Chinese growth for 2011 stands at an impressive 9.2%. Good news for China is good news for Australia. This pair has broken down through support levels at 1.48 this morning, and there is scope for further sterling losses towards 1.47 today.	FORECAST
STERLING/NEW ZEALAND DOLLAR: The kiwi dollar is making hefty gains this morning in response to the good news from China. Sterling has already declined by a cent and a half since last night, purely as a result of the news that China grew at a faster pace than expected last quarter. There has been growing speculation of a sharp decline in Chinese growth of late, but figures such as these and the good industrial production figures that accompanied last night’s GDP figure, point to a “soft landing” from the booming growth of last year. This pair is trading down at 1.9150 this morning, and a further decline looks a good bet today. The kiwi dollar is performing excellently at present.	FORECAST
STERLING/CANADIAN DOLLAR: Sterling lost further ground against the Canadian dollar, ahead of Bank of Canada interest rate meeting. The good news from China filtered into demand for the loonie as well, and this pair saw further downside. Today’s session brings an important US manufacturing indicator, which should benefit the Canadian currency. The main event today is the Bank of Canada’s monthly rate-setting meeting. The central bank is expected to leave rates on hold at 1.0%, but the assessments made within the BoC’s statement will be watched closely. This pair is trading at 1.5550 today and could lose further ground.	FORECAST
This post is prepared by Caxton FX Ltd for information purposes only and may contain personal views that are not the opinion of the company. This is not an offer to purchase or sell any security or an investment advertisement. Caxton FX Ltd is authorised and regulated by the Financial Services Authority, although foreign exchange transactions with Caxton FX are regulated by HM Revenue and Customs. This email does not constitute advice for any foreign exchange transaction, nor is it intended as a solicitation for funds or recommendation to trade.

Morning Report

Richard Driver, Analyst After rumours of a French credit downgrade sent the euro tumbling on Friday, Standard& Poor’s dealt nine eurozone states the blow it has been warning of for weeks. The news undermined the positivity that had emerged as a result of ECB President Draghi’s surprisingly upbeat press conference on Thursday. The markets will continue to mull over Friday’s events, particularly European traders who have not yet responded. There is a dearth of scheduled announcements today, though Draghi will be speaking this evening.
STERLING/EURO: Eurozone downgrades give sterling a cent and a half push in the right direction. France and Austria lost its AAA credit rating from S&P on Friday (which represented a one notch cut), whilst other eurozone states including Spain, Italy and Portugal were dealt a two-notch blow. The move was expected by many, though it did catch the market a little off guard by coming sooner than expected, and the euro weakened as you would anticipate. Sterling is trading up at a healthy €1.21 level this morning and we are betting on further euro-weakness this week. With eurozone data consistently weak, the euro is unlikely to get much respite in the coming sessions.	FORECAST
STERLING/US DOLLAR: Sterling continues to trade at multi-month lows against the safe-haven dollar as the floodgates of eurozone headlines reopen. US consumer sentiment data was impressive on Friday, hitting an eleven-month high and pointing to further gains in US economic improvement. Today is Martin Luther King Day in America, so we will have to wait until tomorrow for some further US economic indicators. Global stocks inevitably finished in the red on Friday, with the US dollar a key beneficiary. Still though, UK gilts remain a safe-haven and sterling sees investment by association, so there was no major side for this pair, which is trading at $1.53.	FORECAST
EURO/US DOLLAR: Eurozone debt downgrades trigger a two-cent collapse for this pair and confidence is likely to be scarce this week. The euro resumed its downtrend against the US dollar on Friday. Reports merged that Greek negotiations on private sector involvement (haircuts) have stalled, but the blanket downgrade in the eurozone naturally stole the headlines. Bond yields are likely to feel the heat this week as a result, regardless of the ECB’s liquidity operations. The euro is trading below $1.27 this morning and there is a chance of a brief relief rally today, but beyond this we are betting on further euro losses as the picture worsens once again.	FORECAST
STERLING/AUSTRALIAN DOLLAR: Even the negative eurozone headlines can’t seem to drive sterling higher against commodity currencies like the aussie dollar. Australian jobs data was poor again last night, contracting for the fifth month out of six. Home loans data was better, possibly helped by the recent Reserve Bank of Australia’s interest rate cuts. The labour market issue in Australia is a real concern though, and we may see it push the RBA to cut rates again soon. This evening’s Asian session brings a key Chinese figure – final quarter 2011 GDP. The aussie will be driven by this data release. This pair is trading just above 1.48, and only a stronger than expected Chinese figure is likely to drive sterling lower.	FORECAST
STERLING/NEW ZEALAND DOLLAR: The kiwi dollar proved remarkably resistant to the eurozone debt downgrade headlines. The kiwi dollar is at all-time highs against the euro, suggesting it is a key beneficiary of the eurozone’s current woes. Certainly, we have been expecting the kiwi dollar to weaken off in line with reduced risk appetite. Tonight’s session brings some kiwi business confidence data but this pair looks likely to test lows down at 1.90 at some point this month. If a blanket downgrade in the eurozone doesn’t hurt the kiwi dollar, it’s hard to see what will at the moment.	FORECAST
STERLING/CANADIAN DOLLAR: Sterling remains weak against the Canadian dollar, which continues to benefit from improvements in the US economy. Friday’s excellent US consumer sentiment data bodes well for the Canadian economy and its currency. There was more good domestic news as a result of a monthly trade surplus, though US trade balance data was the poorest we have seen in five months. Oil prices also dipped three cents to $111 per barrel, but sterling remains weak against the loonie.   Sterling is trading at 1.56, and support levels need to kick in today if another slide is to be avoided.	FORECAST
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Morning Report

Richard Driver, Analyst It was an action packed session yesterday, with the Bank of England and the European Central Bank giving their monthly interest rate decisions, as well as a subsequent press conference with ECB President Trichet. Elsewhere, UK manufacturing and industrial production data disappointed, we saw some rare poor US figures and a remarkably positive Spanish bond auction. There is a shortage of major data releases today, so traders will continue to reflect on yesterday’s events, though this afternoon does bring some US trade balance and consumer confidence figures.
STERLING/EURO: BoE and ECB keep interest rates on hold, but a fairly upbeat Draghi and strong Spanish bond auction give the euro a boost. As expected, the Bank of England kept interest rates at 0.50%, as they will do for at least the rest of this year. They also kept the asset purchase programme at £275bn, which is not expected to be stepped up until next month. UK manufacturing production was poor yesterday, revealing a contraction and lowering expectations for fourth quarter UK GDP. The ECB kept the eurozone interest rate on hold at the record low of 1.00%, though another cut is expected to come in the coming months. Draghi asserted that the cheap ECB loans issued last month are having a positive impact and by the result of yesterday’s Spanish bond auction, he may be correct. Spanish yields came down and they saw huge demand, the same may be true today of another Italian bond sale. Sterling is trading at €1.1950 and may remain under pressure today, though better levels should be revisited next week.	FORECAST
STERLING/US DOLLAR: The EUR/USD pairing dragged this pair up off its multi-month lows, with retail sales figures revealing the US is not out of the woods yet. US core retail sales data revealed the first monthly contraction since June 2010. Weekly US unemployment was also weaker than expected, so the market was given a reality check on the uncertainties that remain for the US recovery. Nonetheless, US consumer sentiment is expected to tick up for the fourth consecutive month. Sterling is trading up towards $1.54 this morning, benefitting from a period of dollar weakness. US stocks were on the up yesterday ensured a poor session for the greenback. Sterling may be able to maintain these levels for the time being, but we continue to bet on a stronger dollar.	FORECAST
EURO/US DOLLAR: The market was very short of euros leading up to yesterday’s events, and we saw the single currency benefit from some short-covering. ECB President Draghi gave a fairly upbeat (or perhaps balanced) assessment of conditions in the eurozone. We were expecting to see an understandably pessimistic press conference, but Draghi was positive on the impact of cheap ECB loans on bond yields and easing credit lines. This pair is trading at $1.2850 this morning, well off its lows more than a cent and a half lower. We still see EUR/USD resuming its downwards trend in the coming weeks though, particularly with S&P likely to take downgrading action soon.	FORECAST
STERLING/AUSTRALIAN DOLLAR: Sterling halted its decline against the aussie dollar as long-term support levels kicked in, but declining bond yields improved market sentiment. Positive bond auctions in Spain and Italy yesterday kept risk appetite broadly on the front foot. We remain sceptical that the aussie dollar can appreciate much more, given the risks that continue to hang over the eurozone and the global economy. Sterling has bounced off a rate of 1.48 and is trading half a cent higher. We are likely to see the 1.48 level retested today but we may see it hold firm.	FORECAST
STERLING/NEW ZEALAND DOLLAR: Sterling benefited from a welcome bounce against the kiwi dollar, but these remain very weak levels. Asian stocks climbed yesterday; the Nikkei index rose by almost a percent and a half. However, the kiwi came off marginally, showing signs of being overbought and overextended. Poor US data may have adverse impact on appetite for the kiwi dollar as well. This pair is trading at 1.9350 this morning, having reached lows towards 1.92 yesterday. Sterling will surely see higher levels against the kiwi dollar as soon as eurozone downgrade and Greek default headlines spring up once again.	FORECAST
STERLING/CANADIAN DOLLAR: Poor US retail sales data ensured that sterling found some support against the Canadian dollar.   Contracting US retail sales naturally weighed on sentiment towards the Canadian dollar. Oil prices also fell off sharply yesterday, with Brent crude dropping from close to $115 per barrel to below $111, although it is trading a cent higher today. The Canadian dollar will respond to this afternoon’s US trade and consumer sentiment data, and whilst the former is expected to be poor, the loonie may find some support from the latter. For now, this pair trades just above 1.56.	FORECAST
This post is prepared by Caxton FX Ltd for information purposes only and may contain personal views that are not the opinion of the company. This is not an offer to purchase or sell any security or an investment advertisement. Caxton FX Ltd is authorised and regulated by the Financial Services Authority, although foreign exchange transactions with Caxton FX are regulated by HM Revenue and Customs. This email does not constitute advice for any foreign exchange transaction, nor is it intended as a solicitation for funds or recommendation to trade.