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

Super Sterling Returns

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

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

Eurozone inflation figures on watch

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

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

The market eyeballs US data

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

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

End of week forecast

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

Sasha Nugent

Currency Analyst

Caxton FX

RBA Governor Stevens takes the first steps in weakening the Aussie

After months of complaining about an “uncomfortably” high Australian dollar, RBA Governor Stevens has finally said enough to ease Aussie momentum.

The RBA’s latest monetary policy minutes, revealed that although the effects of the last rate cut are still filtering through the economy, the committee haven’t closed the door on lowering rates further. The central bank has raised the issue of a persistently strong Aussie and the potential problems this can cause for the recovery. Consequently, there have been several attempts to talk down the AUD, but this has failed to make any lasting impact. The prospect of looser monetary policy has not shaken the markets enough to encourage significant Aussie weakness.

This morning, RBA Governor Stevens claimed that he is ‘open minded on intervention to lower AUD’ and this comment got the ball rolling. GBPAUD opened at 1.7253 and has jumped over two cents to 1.7470 during trading today. The fact that Governor Stevens is ‘open’ to intervention suggests the RBA are serious about the currency’s strength, and could act to weaken the Australian dollar if need be.

Sasha Nugent

Currency Analyst

Caxton FX

More euro optimism anyone?

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

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

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

Sasha Nugent

Currency Analyst

Caxton FX

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

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

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

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

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

End of week forecast

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

Sasha Nugent

Currency Analyst

Caxton FX

What is new in the BoE November Inflation Report?

One of the most important things to take from the inflation report is the more positive view on the economy. In Governor Carney’s words, “For the first time in a long time, you don’t have to be an optimist to see the glass as half full. The recovery has taken hold”. Strong economic figures, particularly robust PMI numbers, have encouraged a brighter outlook for UK growth in 2013 and 2014. Consequently, the central bank has raised their forecasts for growth from 1.4% to 1.6% in 2013 and from 2.5% to 2.8% in 2014.

After CPI surprisingly dropped to 2.2%y/y, the BoE now projects inflation will be considerably lower than predicted in August. Although energy price rises are likely to result in an uptick in inflation in the coming months, weak domestic price pressure and the recent strengthening of sterling will keep the inflation rate trending towards the 2%y/y target. Assuming the Bank Rate follows the path of market yields, the inflation target will be reached a year earlier.

The central bank’s outlook for the labour market has also improved and the monetary policy committee now believe that there is a two in five chance that unemployment will reach 7% by the end of next year, and a three in five chance in 2015 (assuming the Bank Rate follows market rates). Considering the MPC have used the unemployment rate as a benchmark to re-evaluate monetary policy, there is a possibility that we could see a rate hike in late 2015. However, Governor Carney repeatedly highlighted the importance of reducing slack, claiming “A strong and sustained recovery is needed to put people back in work and use up the slack in the economy”. Therefore the MPC may hold back on raising interest rates until we witness such a “strong economy”. In addition, Carney outlined that a scenario where the Bank Rate was held constant “shows the potential advantages of keeping rates unchanged after hitting 7% unemployment”.

The main thing to remember is that despite the upward revision in growth projections, and confirmation that the recovery is strengthening, it doesn’t necessarily mean a rate hike is on its way. Although the unemployment rate is expected to reach the threshold earlier than predicted in the last inflation report, in Governor Carney’s words, “what really matters is what we will learn about the economy along the journey to that threshold”. We have seen how quickly the economic picture can change, and therefore it is important for focus to remain on what this picture is showing.

Sasha Nugent

Currency Analyst

Caxton FX

The BoE may be able to keep rates low after all

Today’s inflation figure shocked the market, and has further dampened expectations that the Bank of England may need to raise rates sooner than outlined in forward guidance. CPI came in at 2.2%y/y, the lowest level since September 2012, with the deceleration attributable to lower transport costs and education costs. The pound took a beating post release with GBPUSD dropping to 1.5850 and GBPEUR dipping below 1.1850.

The central bank will publish their updated economic forecasts tomorrow, and in the light of today’s inflation reading, we could see inflation projections revised downwards. In forward guidance, the BoE committed to keeping rates low at least until unemployment was below the 7% threshold, despite above target inflation. With price pressures easing, and the economy improving, there no immediate need to raise rates, and the central bank now has more room to keep policy loose in order to continue to support the recovery.

The market had previously questioned whether the BoE will be able to keep rates low, but with inflation now at 2.2%y/y, pressure on the central bank has eased. What needs to be highlighted is that once energy prices take effect, the decline in the inflation rate is likely to be reversed and the road to achieving price stability will be more difficult.

Sasha Nugent

Currency Analyst

Caxton FX

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

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

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

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

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

End of week forecast

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

Sasha Nugent

Currency Analyst

Caxton FX

Non-farm payrolls revives the tapering debate

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

Sasha Nugent
Currency Analyst
Caxton FX

Inflation figures give ECB a wakeup call

After weeks of bullish investors supporting a strong euro, the single currency has had the rug pulled from under its feet as the ECB cuts its main refinancing rate by 25bps to 0.25%. Ever since last week’s inflation figures showed inflation slowed to 0.7%y/y, there has been increasing pressure for the ECB to act against disinflationary pressures. Today was that day and inflation data was enough to tip the ECB over the edge.

A strong euro has also been an issue for discussion of late, and the decision to cut rates has forced GBPEUR to rally through 1.20 although the rate has now stabilised around 1.1990. EURUSD also took a sharp hit and is now below 1.34. Considering the ECB had no intentions to weaken the euro, it could be said that they have killed two birds with one stone.

Although the market continued to highlight the potential risk of deflation, ECB President Draghi said that despite the expectation of prolonged low inflation, medium to long-term projections are still anchored in positive territory. This suggests that there may not be a need for further cuts in the future and even if there is, the ECB has said there are still a number of tools at its disposal.

Sasha Nugent

Currency Analyst

Caxton FX

UK Services PMI delivers the goods but for how long?

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

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

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

Sasha Nugent

Currency Analyst

Caxton FX