Today saw the Bank of England release minutes from the most recent Monetary Policy Committee (MPC) meeting, revealing a unanimous vote to leave the current programme of quantitative easing unchanged at €275bn.
This was largely expected; the minutes just confirmed that the MPC is happy to adopt a wait-and-see approach to the effects of October’s increase in quantitative easing (QE) on UK growth and inflation.
I wouldn’t have been surprised to see Adam Posen press for additional QE but on this occasion he was in line with his fellow MPC colleagues.
Nonetheless, the MPC noted that the risks of a major eurozone financial collapse is greater than ever, which clearly favours the introduction of further QE down the line.
While inflation dropped fairly sharply in October, Caxton FX expects that the MPC will want to see inflation continue to decline in the coming months before adding further stimulus.
October’s asset-purchases would have run their course by February 2012 but if we see UK inflation continue to drop - as the Bank of England expects it to - and UK growth continues to struggle, which is more than likely, then February seems a strong bet for the next round of QE.
If the Bank ramps up QE next year, thankfully sterling shouldn’t suffer too much when it does come as QE expectations have already made their mark on the pound.
The GBP/EUR rate is looking healthier today, not based on the MPC’s minutes however, but largely due to some awful industrial orders data out of the eurozone.
We feel it’s only a matter of time before the eurozone debt crisis and the imminent eurozone recession sends sterling up above €1.20.
Richard Driver
Senior Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Wednesday, 23 November 2011
Monday, 21 November 2011
Weekly Round-Up and end of week forecast
European bond yields in focus
Eurozone bond yields have very much come into focus in recent weeks. Italian 10-year debt climbed above the 7% mark, considered the level at which borrowing costs become unsustainable. Spanish debt is also coming under major pressure despite a strong election victory by the conservative Populist Party. There has been little good news to come out of the eurozone in recent weeks; a Greek referendum was avoided and Berlusconi’s resignation was finally tendered, but too much uncertainty surrounds the future of the eurozone for the single currency to truly benefit.
The eurozone economy is almost certainly headed for a recession, though the UK economy is also looking very vulnerable to contraction. The euro has sold off badly in recent weeks as a result, falling almost eight cents from the $1.42 level we saw in late October, and sterling has gained three cents from late October lows close to €1.13.
As well as soaring Italian and Spanish bond yields, and the alarming impact they are having on core eurozone bond yields such as France and Austria, the issue of what role the ECB is to play in a long-term plan to deal with debt crisis remains contentious. The Greek situation also remains unresolved, they still need to persuade IMF and EU chiefs to release their next instalment of aid under last year’s bailout agreement, and the second bailout agreement still needs approval. For these reasons and many more besides, the euro is struggling and we view the risks to be firmly skewed to the downside.
US debt concerns return to weigh on risk appetite further
After the panic we saw in the summer surrounding the raising of the US debt ceiling and the 11th hour agreement between the Republicans and the Democrats on cutting the America’s enormous pile of debt, the US fiscal story is back in the headlines. The ‘supercommittee’ given the task to come up with a plan on how to reduce US debt looks highly likely to announce a failure to agree later today.
At the moment, the nervousness caused by the US debt issue is benefiting the dollar significantly. However, if other credit rating agencies follow Standard & Poor’s August removal of America’s AAA credit rating, the dollar really should stand to face some pressure in the longer-term. Spending cuts will need to be agreed and implemented to appease the rating agencies and in turn the market.
Sterling remains fairly resilient to poor UK data
News from the UK economy was negative last week; domestic inflation weakened and unemployment soared in October and the Bank of England has slashed UK growth prospects for next year. It is now a case of “when” not “if” the MPC decide on further quantitative easing. Wednesday’s MPC minutes will be watched closely for this key issue, but early next year seems most likely. Nonetheless, this has been priced in to some extent.
After a very tough start to the week, sterling is trading down at 1.16 against the euro. We still hold the view that safe-haven UK gilt-buying will push the GBP/EUR pair higher towards €1.20 as we close out the year. Against the dollar we are less optimistic; a gloomy outlook for the debt situation in the US and the EU, as well as an ongoing slowdown in growth across the globe should see risk averse trades continue to benefit the US dollar.
End of week forecast:
GBP / EUR 1.17
GBP / USD 1.57
EUR / USD 1.34
GBP / AUD 1.60
Richard Driver
Senior Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Eurozone bond yields have very much come into focus in recent weeks. Italian 10-year debt climbed above the 7% mark, considered the level at which borrowing costs become unsustainable. Spanish debt is also coming under major pressure despite a strong election victory by the conservative Populist Party. There has been little good news to come out of the eurozone in recent weeks; a Greek referendum was avoided and Berlusconi’s resignation was finally tendered, but too much uncertainty surrounds the future of the eurozone for the single currency to truly benefit.
The eurozone economy is almost certainly headed for a recession, though the UK economy is also looking very vulnerable to contraction. The euro has sold off badly in recent weeks as a result, falling almost eight cents from the $1.42 level we saw in late October, and sterling has gained three cents from late October lows close to €1.13.
As well as soaring Italian and Spanish bond yields, and the alarming impact they are having on core eurozone bond yields such as France and Austria, the issue of what role the ECB is to play in a long-term plan to deal with debt crisis remains contentious. The Greek situation also remains unresolved, they still need to persuade IMF and EU chiefs to release their next instalment of aid under last year’s bailout agreement, and the second bailout agreement still needs approval. For these reasons and many more besides, the euro is struggling and we view the risks to be firmly skewed to the downside.
US debt concerns return to weigh on risk appetite further
After the panic we saw in the summer surrounding the raising of the US debt ceiling and the 11th hour agreement between the Republicans and the Democrats on cutting the America’s enormous pile of debt, the US fiscal story is back in the headlines. The ‘supercommittee’ given the task to come up with a plan on how to reduce US debt looks highly likely to announce a failure to agree later today.
At the moment, the nervousness caused by the US debt issue is benefiting the dollar significantly. However, if other credit rating agencies follow Standard & Poor’s August removal of America’s AAA credit rating, the dollar really should stand to face some pressure in the longer-term. Spending cuts will need to be agreed and implemented to appease the rating agencies and in turn the market.
Sterling remains fairly resilient to poor UK data
News from the UK economy was negative last week; domestic inflation weakened and unemployment soared in October and the Bank of England has slashed UK growth prospects for next year. It is now a case of “when” not “if” the MPC decide on further quantitative easing. Wednesday’s MPC minutes will be watched closely for this key issue, but early next year seems most likely. Nonetheless, this has been priced in to some extent.
After a very tough start to the week, sterling is trading down at 1.16 against the euro. We still hold the view that safe-haven UK gilt-buying will push the GBP/EUR pair higher towards €1.20 as we close out the year. Against the dollar we are less optimistic; a gloomy outlook for the debt situation in the US and the EU, as well as an ongoing slowdown in growth across the globe should see risk averse trades continue to benefit the US dollar.
End of week forecast:
GBP / EUR 1.17
GBP / USD 1.57
EUR / USD 1.34
GBP / AUD 1.60
Richard Driver
Senior Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Thursday, 17 November 2011
Positive UK retail sales provides little relief against a gloomy outlook
Data this morning showed that UK retail sales rallied in October by 0.6%, despite a bleak overall picture of the UK economy. The result was a real surprise; market expectations were of a 0.2% contraction.
Today’s data is certainly a positive; retail sales are a very important economic indicator and 0.6% growth is a strong showing indeed. With consumer inflation up at 5.0% and a consumer confidence survey last night hitting new record lows, the market was certainly caught off guard. The figure can be attributed as the result of consumers trying to get ahead, utilising some unusually early Christmas promotions and discounts.
However, the market will remain sceptical. The figure doesn’t really change the overall picture of the UK economy. It probably says more about UK retailer’s desperation than it does about improvements in household balance sheets and spending power. The market will take a great deal more convincing that the UK economy is not heading for tougher times. The chances are we will see retail sales figures fall off later on in the quarter.
Sterling’s response has been pretty limited. Sterling tried to rally on the back of the retail sales figure, but gains were short-lived. The market has accepted that it is a matter of when, not if, we will see a further expansion of the Bank of England’s quantitative easing programme. In this context, where interest rate hikes are off the table, sterling looks hard-pushed to make significant gains off rogue growth figures. External factors in the eurozone are providing much more direction in the exchange rates than economic data at present. Data may not boost the pound but heightened global economic concerns will do.
So, whilst the UK economy is looking its weakest in a long-time, the prospects for the pound are looking their rosiest in a long-time. The pound’s quasi safe-haven appeal, due to the popularity of UK gilts, is pushing it higher against most currencies other than the yen and US dollar and looks likely to continue benefiting from the prevailing risk-off environment.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Today’s data is certainly a positive; retail sales are a very important economic indicator and 0.6% growth is a strong showing indeed. With consumer inflation up at 5.0% and a consumer confidence survey last night hitting new record lows, the market was certainly caught off guard. The figure can be attributed as the result of consumers trying to get ahead, utilising some unusually early Christmas promotions and discounts.
However, the market will remain sceptical. The figure doesn’t really change the overall picture of the UK economy. It probably says more about UK retailer’s desperation than it does about improvements in household balance sheets and spending power. The market will take a great deal more convincing that the UK economy is not heading for tougher times. The chances are we will see retail sales figures fall off later on in the quarter.
Sterling’s response has been pretty limited. Sterling tried to rally on the back of the retail sales figure, but gains were short-lived. The market has accepted that it is a matter of when, not if, we will see a further expansion of the Bank of England’s quantitative easing programme. In this context, where interest rate hikes are off the table, sterling looks hard-pushed to make significant gains off rogue growth figures. External factors in the eurozone are providing much more direction in the exchange rates than economic data at present. Data may not boost the pound but heightened global economic concerns will do.
So, whilst the UK economy is looking its weakest in a long-time, the prospects for the pound are looking their rosiest in a long-time. The pound’s quasi safe-haven appeal, due to the popularity of UK gilts, is pushing it higher against most currencies other than the yen and US dollar and looks likely to continue benefiting from the prevailing risk-off environment.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Wednesday, 16 November 2011
Sterling finding it a little tougher amid poor UK data
UK data is coming back to haunt the pound. The debt crisis has taken the edge off market responses to UK data in recent months and this week has been no different. Still, sterling has come off an eighth-month high against the euro and a nine-week high against the US dollar.
Today’s UK labour market figures revealed that the domestic unemployment rate rose to a 15-year high last month. The Quarterly Inflation Report from the Bank of England has also cut UK growth prospects, indicating that there will be little to no expansion in the first half of 2012. Further quantitative easing looks likely then, which represents a downside risk to sterling.
Tomorrow’s session could also be a tricky one for sterling, with UK retail sales for October likely to show negative growth. The UK economy is in dire straits, there is no doubt about it. Without economic growth we will struggle to maintain the market’s, and the rating agencies’ faith that we have a handle on our debt situation. Then the UK will come under pressure just as core economies such as France and Austria have this week.
Nonetheless, there is no growth in the eurozone and little in the US. The debt situation is weighing on sentiment and activity across the globe, so the UK isn’t alone in its predicament and at least we are borrowing cheaply, for now.
We see sterling struggling against the US dollar, based on continuing appetite for safe-haven assets. Likewise we should see sterling push for fresh multi-month highs against the euro before long, but his may have to wait until next week.
Richard Driver
Senior Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Today’s UK labour market figures revealed that the domestic unemployment rate rose to a 15-year high last month. The Quarterly Inflation Report from the Bank of England has also cut UK growth prospects, indicating that there will be little to no expansion in the first half of 2012. Further quantitative easing looks likely then, which represents a downside risk to sterling.
Tomorrow’s session could also be a tricky one for sterling, with UK retail sales for October likely to show negative growth. The UK economy is in dire straits, there is no doubt about it. Without economic growth we will struggle to maintain the market’s, and the rating agencies’ faith that we have a handle on our debt situation. Then the UK will come under pressure just as core economies such as France and Austria have this week.
Nonetheless, there is no growth in the eurozone and little in the US. The debt situation is weighing on sentiment and activity across the globe, so the UK isn’t alone in its predicament and at least we are borrowing cheaply, for now.
We see sterling struggling against the US dollar, based on continuing appetite for safe-haven assets. Likewise we should see sterling push for fresh multi-month highs against the euro before long, but his may have to wait until next week.
Richard Driver
Senior Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Thursday, 3 November 2011
Greek indecision will surely weigh on the euro through November
With hopes raised for a long-term strategy to deal with the eurozone debt crisis, October saw the euro rebound strongly from its late summer decline. Merkel and Sarkozy pledged action and to some extent delivered at last week’s EU Summit. Three major issues were addressed; the European banking sector is to be firmed up with a €110bn recapitalisation, the eurozone bailout fund (the EFSF) is to be expanded by almost five times to around €1trn, and it was agreed that there would be a 50% haircut on Greek bond holdings. The euphoria surrounding the progress has come down with a crash, with Greek Prime Minister Papandreou announcing a referendum on Greece’s recent bailout deal. There is a constant flurry of headlines out of Greece at present, and the latest suggest that the referendum may now be avoided. Regardless, with so much uncertainty surrounding Greece’s government, a messy Greek default remains a distinct possibility and has been reflected in a euro decline.
Heightened uncertainty has seen safe haven assets such as the US dollar come back into favour. We have seen the euro bounce back from much lower levels than the ones we are seeing at present, but the probable delay to progress caused by Greek politics may well see risk appetite hemmed in for at least this month. Sterling and the dollar have plenty of factors weighing on them, but in the current climate of financial market turbulence and global economic slowdown, the current task of the market is to find the ‘least unattractive’ options.
Sterling/Euro
Third quarter UK growth came in at 0.5% on Tuesday; an encouraging showing on the surface but the market was more concerned with an awful UK manufacturing figure for October (the lowest since July 2009). With the UK services sector also slowing down alarmingly in October, the UK economy looks highly likely to suffer a slowdown in the final quarter of this year and a dip back into recession looks to be very much on the cards. This is likely to see the Monetary Policy Committee step up its quantitative easing programme, which was only recently increased in October. We are currently looking for yet more QE early in 2012, which will no doubt dampen sterling’s appeal in the longer-term should it come to fruition.
However, the euro is facing even graver issues. Just when market confidence had returned following some major decisions at the last EU summit, the Greek issue has returned to jeopardise all the progress that was made. The prospect of waiting several weeks for a Greek election or a referendum (as yet it’s unclear which one, if either), which could conceivably produce the outcome of a Greek euro-area exit and disorderly default, has seen risky assets such as the euro plummet once again. It is a dangerous game to base exchange rate predictions upon knife-edge political votes. Fortunately this won’t be necessary just yet as any vote, be it an election or a referendum, will not come this month.
This pair has made another attempt at the €1.17 mark this week but was rejected. Any foray too far away from the €1.15 level is proving to be fairly fleeting, and we are now trading a cent lower. The euro has also come under some selling pressure as a result of a 0.25% ECB interest rate cut, which reduced the euro’s return differential. However, once the dust settles on this surprise move, it may be seen as a wise and assertive move to help deal with the eurozone’s economic problems.
Assuming risk appetite remains hemmed in this month as a result of the ongoing Greek tragedy and safe-haven demand for UK gilts remains elevated, the euro looks hard-pushed to sustain much of a rebound. Headlines and developments out of Greece will be crucial but the weeks ahead should see the GBP/EUR rate trade predominantly in the €1.15-1.17 range, with a chance of a climb even higher.
Sterling/US Dollar
Last month’s dollar rally proved something of a false dawn. The dollar was unable to sustain its move down to the low $1.50s due to some positive headlines out of last week’s EU Summit and the resulting recovery in global stock indices. Still, the prospects for the dollar look positive for the coming month, in light of the huge uncertainties surrounding Greece’s political and fiscal situation, as well as ongoing declines in global economic data.
US Federal Reserve Chairman Ben Bernanke has asserted that overall growth strengthened in the US over the third quarter, but as usual he emphasised the “downside risks” moving forward and downgraded his growth forecasts. In particular, he was bearish on the outlook for the US labour market over the next two years. It is looking less a case of if, but when the Fed pulls the trigger on QE3. Nonetheless, we are probably looking at Q1 2012 at the earliest, which should not impact too much on the dollar’s performance this month.
The EUR/USD pairing will as ever provide much of this pair’s direction. Our bet is that the dollar will outperform the euro this month, which is likely to prevent GBP/USD making any sustained moves north of the $1.60 mark.
Caxton FX one month forecast:
GBP / EUR 1.17
GBP / USD 1.58
EUR / USD 1.35
Richard Driver
Senior Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Heightened uncertainty has seen safe haven assets such as the US dollar come back into favour. We have seen the euro bounce back from much lower levels than the ones we are seeing at present, but the probable delay to progress caused by Greek politics may well see risk appetite hemmed in for at least this month. Sterling and the dollar have plenty of factors weighing on them, but in the current climate of financial market turbulence and global economic slowdown, the current task of the market is to find the ‘least unattractive’ options.
Sterling/Euro
Third quarter UK growth came in at 0.5% on Tuesday; an encouraging showing on the surface but the market was more concerned with an awful UK manufacturing figure for October (the lowest since July 2009). With the UK services sector also slowing down alarmingly in October, the UK economy looks highly likely to suffer a slowdown in the final quarter of this year and a dip back into recession looks to be very much on the cards. This is likely to see the Monetary Policy Committee step up its quantitative easing programme, which was only recently increased in October. We are currently looking for yet more QE early in 2012, which will no doubt dampen sterling’s appeal in the longer-term should it come to fruition.
However, the euro is facing even graver issues. Just when market confidence had returned following some major decisions at the last EU summit, the Greek issue has returned to jeopardise all the progress that was made. The prospect of waiting several weeks for a Greek election or a referendum (as yet it’s unclear which one, if either), which could conceivably produce the outcome of a Greek euro-area exit and disorderly default, has seen risky assets such as the euro plummet once again. It is a dangerous game to base exchange rate predictions upon knife-edge political votes. Fortunately this won’t be necessary just yet as any vote, be it an election or a referendum, will not come this month.
This pair has made another attempt at the €1.17 mark this week but was rejected. Any foray too far away from the €1.15 level is proving to be fairly fleeting, and we are now trading a cent lower. The euro has also come under some selling pressure as a result of a 0.25% ECB interest rate cut, which reduced the euro’s return differential. However, once the dust settles on this surprise move, it may be seen as a wise and assertive move to help deal with the eurozone’s economic problems.
Assuming risk appetite remains hemmed in this month as a result of the ongoing Greek tragedy and safe-haven demand for UK gilts remains elevated, the euro looks hard-pushed to sustain much of a rebound. Headlines and developments out of Greece will be crucial but the weeks ahead should see the GBP/EUR rate trade predominantly in the €1.15-1.17 range, with a chance of a climb even higher.
Sterling/US Dollar
Last month’s dollar rally proved something of a false dawn. The dollar was unable to sustain its move down to the low $1.50s due to some positive headlines out of last week’s EU Summit and the resulting recovery in global stock indices. Still, the prospects for the dollar look positive for the coming month, in light of the huge uncertainties surrounding Greece’s political and fiscal situation, as well as ongoing declines in global economic data.
US Federal Reserve Chairman Ben Bernanke has asserted that overall growth strengthened in the US over the third quarter, but as usual he emphasised the “downside risks” moving forward and downgraded his growth forecasts. In particular, he was bearish on the outlook for the US labour market over the next two years. It is looking less a case of if, but when the Fed pulls the trigger on QE3. Nonetheless, we are probably looking at Q1 2012 at the earliest, which should not impact too much on the dollar’s performance this month.
The EUR/USD pairing will as ever provide much of this pair’s direction. Our bet is that the dollar will outperform the euro this month, which is likely to prevent GBP/USD making any sustained moves north of the $1.60 mark.
Caxton FX one month forecast:
GBP / EUR 1.17
GBP / USD 1.58
EUR / USD 1.35
Richard Driver
Senior Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Tuesday, 1 November 2011
Euro Panic: Greek default back on the table
EU Summit made progress but Greece drops a bombshell
The European debt crisis has dominated market sentiment over the past few weeks but last week saw some progress made. The EFSF (bailout fund) is to be leveraged and expanded by almost five times (to €1trn).There is to be a €110bn recapitalisation of Europe’s banks, and there is to be a 50% haircut on Greek bond holdings. The market received the plan positively but confidence has since waned and the euro’s gains have been reversed. There remain major question marks, such as how the fund will be leveraged, and how EU leaders intend to get eurozone growth back on track.
But most alarmingly, the Greek situation has hit the headlines once again, with Greek PM George Papandreou allowing a referendum on last week’s €130bn bailout package. This is a real revelation and the prospect of a messy Greek default is very much back on the table now. The euro has given away over five cents to the dollar this week already, mirroring sharp losses in global stock markets. In addition, Italian bond yields are consistently hitting fresh euro-era highs.
The market awaits clues as to central bank monetary policy
Also in focus this week are monetary policy decisions from the US Federal Reserve and the European Central Bank. The Fed looks unlikely to announce QE3 at its meeting this Wednesday. Particularly on the back of last week’s stronger than expected GDP figure, which showed the US economy grew at an annualised rate of 2.50% in Q3 2011. Forward looking US data is nonetheless pointing towards a slowdown, and the market remains hopeful for another round of QE from the Fed. First quarter 2012 remains a decent bet, which is likely to weigh on the US dollar in the long-term.
The European Central Bank will meet on Thursday, which will be Mario Draghi’s first as President of the central bank. There is a chance of an interest rate cut but our bet is that with inflation at 3.0%, we may have to wait at least a month for the ECB to loosen monetary policy. The real driver of the euro is likely to be how the Greek crisis progresses from its latest negative turn.
Q3 UK GDP impresses but the market wasn’t fooled
Estimated UK growth data for the third quarter was 0.5%, above expectations and well above Q2’s 0.1% figure. Sterling has failed to rally however, as the simultaneous release of October’s manufacturing PMI growth pointed to a very gloomy Q4 performance. The figure was the worst in over two years and triggered major concerns about another UK recession and further QE from the MPC.
Sterling is trading just above €1.1650 today, which is close to a three-month high. This week looks set to be a tough one for the single currency, and although there are downside risks posed by this week’s UK services and construction growth figures, GBP/EUR may continue to trade strongly this week. In line with renewed Greek concerns and plummeting global stocks, we are likely to see the safe-haven dollar outperform both the euro and the pound in coming sessions. Friday’s US Non-Farm payroll figure could well reveal further fault lines in the US recovery and intensify risk averse trades. Major headlines out of the eurozone, as ever, will trump fundamental data, but these are proving more unpredictable than ever.
As ever, views are very welcome!
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
The European debt crisis has dominated market sentiment over the past few weeks but last week saw some progress made. The EFSF (bailout fund) is to be leveraged and expanded by almost five times (to €1trn).There is to be a €110bn recapitalisation of Europe’s banks, and there is to be a 50% haircut on Greek bond holdings. The market received the plan positively but confidence has since waned and the euro’s gains have been reversed. There remain major question marks, such as how the fund will be leveraged, and how EU leaders intend to get eurozone growth back on track.
But most alarmingly, the Greek situation has hit the headlines once again, with Greek PM George Papandreou allowing a referendum on last week’s €130bn bailout package. This is a real revelation and the prospect of a messy Greek default is very much back on the table now. The euro has given away over five cents to the dollar this week already, mirroring sharp losses in global stock markets. In addition, Italian bond yields are consistently hitting fresh euro-era highs.
The market awaits clues as to central bank monetary policy
Also in focus this week are monetary policy decisions from the US Federal Reserve and the European Central Bank. The Fed looks unlikely to announce QE3 at its meeting this Wednesday. Particularly on the back of last week’s stronger than expected GDP figure, which showed the US economy grew at an annualised rate of 2.50% in Q3 2011. Forward looking US data is nonetheless pointing towards a slowdown, and the market remains hopeful for another round of QE from the Fed. First quarter 2012 remains a decent bet, which is likely to weigh on the US dollar in the long-term.
The European Central Bank will meet on Thursday, which will be Mario Draghi’s first as President of the central bank. There is a chance of an interest rate cut but our bet is that with inflation at 3.0%, we may have to wait at least a month for the ECB to loosen monetary policy. The real driver of the euro is likely to be how the Greek crisis progresses from its latest negative turn.
Q3 UK GDP impresses but the market wasn’t fooled
Estimated UK growth data for the third quarter was 0.5%, above expectations and well above Q2’s 0.1% figure. Sterling has failed to rally however, as the simultaneous release of October’s manufacturing PMI growth pointed to a very gloomy Q4 performance. The figure was the worst in over two years and triggered major concerns about another UK recession and further QE from the MPC.
Sterling is trading just above €1.1650 today, which is close to a three-month high. This week looks set to be a tough one for the single currency, and although there are downside risks posed by this week’s UK services and construction growth figures, GBP/EUR may continue to trade strongly this week. In line with renewed Greek concerns and plummeting global stocks, we are likely to see the safe-haven dollar outperform both the euro and the pound in coming sessions. Friday’s US Non-Farm payroll figure could well reveal further fault lines in the US recovery and intensify risk averse trades. Major headlines out of the eurozone, as ever, will trump fundamental data, but these are proving more unpredictable than ever.
As ever, views are very welcome!
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Friday, 28 October 2011
EU leaders sidestep eurozone growth issue
So the euro has made some monster gains this month, first as a result of hopes and speculation of major action on some key eurozone debt issues, which were then built upon when EU leaders finally delivered the goods. Bailout fund enlargement, recapitalisation, Greek haircuts – some major decisions were made (though a whole world of detail remains yet to be negotiated). But what about another key issue that was cited as a priority in the build up to the EU Summit- eurozone growth.
Weak growth is plaguing the eurozone periphery; the austerity programmes in countries like Greece, Spain, and the ones that will soon be implemented in Italy are strangling any sort of economic expansion. Perhaps even more alarmingly, growth in the core nations of France and Germany has also slowed down considerably, leaving a dip back into a full eurozone recession a strong possibility.
Without plans for economic growth, the peripheral states will be unable to meet their austerity targets, and again they will come under heightened pressure in the bond markets. One way EU officials can help eurozone growth is through cutting interest rates. The ECB has been looking to hike throughout 2011, the eurozone base rate has risen from 1.00% to 1.50% to curb rising inflation. This has triggered gains in the strength of the single currency which has hurt the periphery further.
Incoming ECB President Mario Draghi will be chairing his first meeting next week, with Trichet having finished his tenure this month. It is not beyond the realms of possibility that he will respond to the downturn in regional growth by cutting interest rates and relieving some pressure. With inflation up at 3.0%, the ECB may be wary, and recent data actually showed that money supply growth accelerated in September. The markets are anticipating a 0.25% rate cut by the end of the year. Perhaps the periphery will have to wait until December for some respite.
The growth issue will come up again and again in coming months and years. It was clearly sidestepped at Wednesday’s EU summit, but the markets will force EU leaders to revisit it.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Weak growth is plaguing the eurozone periphery; the austerity programmes in countries like Greece, Spain, and the ones that will soon be implemented in Italy are strangling any sort of economic expansion. Perhaps even more alarmingly, growth in the core nations of France and Germany has also slowed down considerably, leaving a dip back into a full eurozone recession a strong possibility.
Without plans for economic growth, the peripheral states will be unable to meet their austerity targets, and again they will come under heightened pressure in the bond markets. One way EU officials can help eurozone growth is through cutting interest rates. The ECB has been looking to hike throughout 2011, the eurozone base rate has risen from 1.00% to 1.50% to curb rising inflation. This has triggered gains in the strength of the single currency which has hurt the periphery further.
Incoming ECB President Mario Draghi will be chairing his first meeting next week, with Trichet having finished his tenure this month. It is not beyond the realms of possibility that he will respond to the downturn in regional growth by cutting interest rates and relieving some pressure. With inflation up at 3.0%, the ECB may be wary, and recent data actually showed that money supply growth accelerated in September. The markets are anticipating a 0.25% rate cut by the end of the year. Perhaps the periphery will have to wait until December for some respite.
The growth issue will come up again and again in coming months and years. It was clearly sidestepped at Wednesday’s EU summit, but the markets will force EU leaders to revisit it.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Thursday, 27 October 2011
EU deal sends the euro soaring
The euro is going from strength to strength today in the aftermath of yesterday’s EU Summit package. Have EU leaders solved the problem? No, not by a long way but they exceeded expectations and the market has welcomed it with open arms. US and European equities are booming (the FTSE is over 2.5% up), as are riskier currencies such as the aussie dollar and the euro.
Decisions have been made on all three of the key issues of contention -bank recapitalisation, Greece’s debt burden, and the eurozone bailout fund. European banks will benefit from around €100bn worth of recapitalisation, in order to deal with losses stemming from Greece. On the Greek debt issue, a 50% haircut has been agreed. With regard to the bailout fund (the EFSF); it is to be expanded by almost five times next month (to around €1trn).
There were rumours of a lack of progress and delayed decisions throughout yesterday, so these plans have triggered a wave of positive trading throughout the financial markets. Concerns surrounding the various holes in the plans (How will the EFSF be leveraged? Are the haircuts really voluntary? What about eurozone growth?) have been put on the backburner for now but will undoubtedly resurface. There is plenty of negotiation ahead, which means plenty more disagreement and plenty more alarm bells. Italy remains very vulnerable in the debt markets and it still remains to be seen whether the decision to write down Greece’s debt will succeed in putting the country on a sustainable footing.
If the euro is to kick on further from here, the trigger is likely to come from outside. One method of expanding the EFSF is through external investment from countries like China or Brazil. It is no secret that Asian sovereigns are eager to diversify away from the dollar and into the euro, so such investment would make sense. It is not beyond EU leaders to fail to implement this plan, or for the deal to collapse altogether. The risk is there, but you have to say the recent deal certainly brightens the prospects of the euro in the longer-term.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Decisions have been made on all three of the key issues of contention -bank recapitalisation, Greece’s debt burden, and the eurozone bailout fund. European banks will benefit from around €100bn worth of recapitalisation, in order to deal with losses stemming from Greece. On the Greek debt issue, a 50% haircut has been agreed. With regard to the bailout fund (the EFSF); it is to be expanded by almost five times next month (to around €1trn).
There were rumours of a lack of progress and delayed decisions throughout yesterday, so these plans have triggered a wave of positive trading throughout the financial markets. Concerns surrounding the various holes in the plans (How will the EFSF be leveraged? Are the haircuts really voluntary? What about eurozone growth?) have been put on the backburner for now but will undoubtedly resurface. There is plenty of negotiation ahead, which means plenty more disagreement and plenty more alarm bells. Italy remains very vulnerable in the debt markets and it still remains to be seen whether the decision to write down Greece’s debt will succeed in putting the country on a sustainable footing.
If the euro is to kick on further from here, the trigger is likely to come from outside. One method of expanding the EFSF is through external investment from countries like China or Brazil. It is no secret that Asian sovereigns are eager to diversify away from the dollar and into the euro, so such investment would make sense. It is not beyond EU leaders to fail to implement this plan, or for the deal to collapse altogether. The risk is there, but you have to say the recent deal certainly brightens the prospects of the euro in the longer-term.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Wednesday, 26 October 2011
So how will the market respond to today’s eurozone plans?
Today’s EU Summit will be covering a range of issues, top of the list are the recapitalisation of Europe’s banks, the expansion of the EFSF (bailout fund) and the haircuts to be imposed on Greek debt. The meeting has been the sole focus of the market for the past fortnight.
There was already disappointing news yesterday that a meeting between EU finance ministers scheduled today has been cancelled due to a lack of agreement, though the main meeting between EU leaders is set to go ahead. Expectations for progress have been heightened; market confidence in EU leadership remains palpably lifted it seems. Though all the tell-tale signs of delay and disagreement point to the strong possibility of a fudged and inadequate compromise being delivered today.
It would be surprising if the EU Summit failed to deliver something that represented a decent attempt at “comprehensive package.” Many will be betting that the euro stands to benefit from any signs of genuine progress on the eurozone’s severe economic and fiscal woes. However, we are betting that the euro will suffer a slide. First, there is a strong chance that the package could fail to meet market expectations. Second, the package could be impressive, but the market may well take “buy the rumour, sell the fact” approach and choose to take profit on the euro’s gains this month.
We know one thing for sure, today’s EU Summit will leave plenty of details to be ironed out, plenty of obstacles to be overcome, and plenty of issues unresolved. These are factors that could see the euro sell-off in the immediate aftermath of tomorrow’s Summit, or alternatively once the dust settles. Either way, the euro looks a little strong at €1.15 and $1.39 and we are looking for a downward correction for the euro.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
There was already disappointing news yesterday that a meeting between EU finance ministers scheduled today has been cancelled due to a lack of agreement, though the main meeting between EU leaders is set to go ahead. Expectations for progress have been heightened; market confidence in EU leadership remains palpably lifted it seems. Though all the tell-tale signs of delay and disagreement point to the strong possibility of a fudged and inadequate compromise being delivered today.
It would be surprising if the EU Summit failed to deliver something that represented a decent attempt at “comprehensive package.” Many will be betting that the euro stands to benefit from any signs of genuine progress on the eurozone’s severe economic and fiscal woes. However, we are betting that the euro will suffer a slide. First, there is a strong chance that the package could fail to meet market expectations. Second, the package could be impressive, but the market may well take “buy the rumour, sell the fact” approach and choose to take profit on the euro’s gains this month.
We know one thing for sure, today’s EU Summit will leave plenty of details to be ironed out, plenty of obstacles to be overcome, and plenty of issues unresolved. These are factors that could see the euro sell-off in the immediate aftermath of tomorrow’s Summit, or alternatively once the dust settles. Either way, the euro looks a little strong at €1.15 and $1.39 and we are looking for a downward correction for the euro.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Wednesday, 19 October 2011
MPC Minutes show unanimous vote for quantitative easing
This morning’s release of the minutes from the MPC’s meeting in early October reveals that all nine policymakers voted in favour of further quantitative easing. The MPC settled on £75bn extra asset-purchases, bringing the programme up to £275bn.
Quantitative easing involves printing money and pumping it into the economy. This increases the supply of a currency and historically weakens its demand.
There is a positive to have surfaced from the today’s MPC minutes. The market will value the fact that the MPC is showing a united front on the issue of QE; the policymakers appear clear that QE is absolutely necessary in order to safeguard the UK economy.
The minutes show that fears for the UK’s economic outlook have risen significantly in recent months. Data out of the UK this month has not actually been too bad; the manufacturing and services sector growth figures for September were significantly better than expected. However, concerns that forward-looking data suggests a further slowdown are prevailing. There are signs that concrete progress on the eurozone debt crisis will be made this weekend, but there will be no magic wand solution and the UK remains vulnerable to financial tensions in Europe. These are the two key concerns for the MPC.
Amid the context of weak growth and global financial turmoil, the QE call from the MPC was the right one. The fact that £100bn worth of asset-purchases was debated at the last MPC meeting suggests that there is plenty of scope for yet more quantitative easing here in the UK. The BoE’s last quarterly inflation report gave a glowing assessment of the boost the last round of QE gave to UK GDP, so more asset-purchases early next year would not be a surprise. The minutes clearly show that the MPC will be constantly reviewing the size of the asset-purchase programme in line with developments at both home and abroad.
One major issue is that of soaring UK inflation, which quantitative easing could well exacerbate. Data this week showed that UK headline inflation hit 5.2% in September, which represents a three year high. The BoE is convinced the figure will come back down to 2.0% next year due to weaker growth. However, if inflation persists at these sorts of levels, the MPC may delay its decision to introduce yet more asset-purchases. Such high inflation combined with such weak growth also highlights the threat of stagflation in the UK.
Sterling suffered a knee-jerk slide on the news that the MPC voted unanimously for QE, but losses were quickly recouped against both the euro and the dollar. The minutes really just confirmed the market’s strong suspicions that the MPC acted assertively on QE and is happy to do so again if conditions dictate. Sterling is likely to struggle to gain any real favour until economic growth picks up. External factors, particularly events in the eurozone, are likely to determine whether sterling can climb.
Richard Driver
Currency Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Quantitative easing involves printing money and pumping it into the economy. This increases the supply of a currency and historically weakens its demand.
There is a positive to have surfaced from the today’s MPC minutes. The market will value the fact that the MPC is showing a united front on the issue of QE; the policymakers appear clear that QE is absolutely necessary in order to safeguard the UK economy.
The minutes show that fears for the UK’s economic outlook have risen significantly in recent months. Data out of the UK this month has not actually been too bad; the manufacturing and services sector growth figures for September were significantly better than expected. However, concerns that forward-looking data suggests a further slowdown are prevailing. There are signs that concrete progress on the eurozone debt crisis will be made this weekend, but there will be no magic wand solution and the UK remains vulnerable to financial tensions in Europe. These are the two key concerns for the MPC.
Amid the context of weak growth and global financial turmoil, the QE call from the MPC was the right one. The fact that £100bn worth of asset-purchases was debated at the last MPC meeting suggests that there is plenty of scope for yet more quantitative easing here in the UK. The BoE’s last quarterly inflation report gave a glowing assessment of the boost the last round of QE gave to UK GDP, so more asset-purchases early next year would not be a surprise. The minutes clearly show that the MPC will be constantly reviewing the size of the asset-purchase programme in line with developments at both home and abroad.
One major issue is that of soaring UK inflation, which quantitative easing could well exacerbate. Data this week showed that UK headline inflation hit 5.2% in September, which represents a three year high. The BoE is convinced the figure will come back down to 2.0% next year due to weaker growth. However, if inflation persists at these sorts of levels, the MPC may delay its decision to introduce yet more asset-purchases. Such high inflation combined with such weak growth also highlights the threat of stagflation in the UK.
Sterling suffered a knee-jerk slide on the news that the MPC voted unanimously for QE, but losses were quickly recouped against both the euro and the dollar. The minutes really just confirmed the market’s strong suspicions that the MPC acted assertively on QE and is happy to do so again if conditions dictate. Sterling is likely to struggle to gain any real favour until economic growth picks up. External factors, particularly events in the eurozone, are likely to determine whether sterling can climb.
Richard Driver
Currency Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
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