Richard Driver, Analyst With many traders off on their Christmas holidays already, markets are very thin indeed now. US GDP was surprisingly revised downwards for Q3 of this year, revealing growth at an annualised rate of 1.8%. Still the market was not too bothered, comforted by the pick-up in US growth we have seen in the final quarter of the year and the improved outlook for 2012. Today’s session brings plenty of US data but if yesterday’s GDP figure failed to leave an impact, today’s releases will also go unnoticed. From all the team at Caxton FX, have a great Christmas.
STERLING/EURO: Sterling’s safe haven bid continues to provide support against the single currency, helped by improved UK GDP figure. UK GDP hit 0.6% in the third quarter of 2011, which was slightly better than expected. The market will be all too aware that the outlook for the UK economy leaves little to get excited about, but the GDP figure was still a nice surprise. Less positive was news that the UK’s current account deficit widened to its worst level in almost a year and a half. The safe-haven attraction of UK gilts, and sterling by association, has taken sterling up above €1.20, its highest point since early January 2011. Further gains are likely to come, but perhaps not today.	FORECAST
STERLING/US DOLLAR: This pair remains range bound as data fails to leave its mark and as the flow of headlines dries up. US GDP was revised downwards to 1.8% (annualised) for Q3 2011. This 0.2% downward revision is actually pretty disappointing but the markets didn’t respond. The Wall Street Journal has reported that the US Federal Reserve could leave interest rates at their current record lows of 0.25% until 2014 and beyond. This is dollar-negative in the long-term but will not worry the markets in the short and medium term. Sterling is trading at $1.57, which represents a stronger finish to the year than we expected. Despite a warning from Moody’s about the UK’s treasured triple-A rating, sterling has done traded very well in the past fortnight or so.	FORECAST
EURO/US DOLLAR: The euro continues to hover above the psychological $1.30 mark but we are still anticipating another push lower. ECB policymaker Smaghi has called for quantitative easing to boost the eurozone economy if deflation risks emerge moving forward. With QE consistently ruled out by the ECB, this is an interesting development and will certainly have caught the market’s eye. Unfortunately for the market, which would welcome eurozone QE strongly, Smaghi’s tenure at the ECB ends very soon so hopefully he will persuade some of his colleagues before doing so. The euro is trading at $1.3075 this morning, European stocks have opened strongly, so a push below $1.30 may have to wait until after Christmas and perhaps the New Year.	FORECAST
STERLING/AUSTRALIAN DOLLAR: Aussie trading positively, helped by demand for Australian government bonds. Australia has also managed to maintain its AAA credit rating, and demand for its government bonds is giving the aussie dollar some decent support. This club of top-rated government debt will continue to shrink and for those nations that hang on to it, the associated currencies will reap the rewards. Sterling is trading at 1.5450 this morning, and no major movements seem likely.	FORECAST
STERLING/NEW ZEALAND DOLLAR: Sterling edged lower against the kiwi dollar despite the worrying news of another earthquake in Christchurch. Christchurch is still bouncing back from the destructive earthquake we saw in the city earlier on in the year. Another quake will strengthen the case for another interest rate cut from the Reserve Bank of New Zealand. The kiwi dollar still managed to strengthen against sterling however, helped by some positive weekly jobs data. Despite losses in Asian stocks last night, this pair is trading down at 2.0250, and we may see a session of range-bound trading.	FORECAST
STERLING/CANADIAN DOLLAR: The loonie continued to make gains over sterling yesterday, helped by a decent bounce in the US stock market. Positive US risk sentiment drove the Canadian dollar forward yesterday, traders turned a blind eye to the downward revision of the US GDP figure and focused on some improvements in the US labour market. US unemployment continues to be the number one concern in the US economy. This pair is trading at 1.60 this morning. We have a monthly Canadian GDP figure later today, which expected to show growth of just 0.1%, but as ever US GDP will probably overshadow.	FORECAST

Financial recovery stalls in 2011 but will next year be any better?

An article from James Hickman, MD of Caxton FX, reviewing the past year and what we can expect in 2012.


What a year 2011 has been: the uprisings in the Arab world, earthquakes in Japan and New Zealand and not to mention the deaths of three dictators, the Royal Wedding and the London riots.

In terms of the financial environment, if we look back to the end of 2010 we were still waiting for conditions to improve for the global economic recovery and as we approach the end of 2011, we still cannot see the wood for the trees.

2011 was meant to be a year where we took bigger steps towards the goal of economic improvement but in my mind, there have been two key factors which have prevented this from happening.

Firstly, there has been a top-down liquidity squeeze which has had a significant impact on everyone from countries and large banks right down to individuals and small businesses.

In short, no-one can easily borrow money and as we all know, accessing affordable loans is key to a vibrant and growing economy, whether you are the government or a small shop keeper.

What this has resulted in at the top end – which is the really worrying part – is that some countries have been unable to repay existing loans and debts. Consequently, some loans have been written off causing share values to plummet and the very real situation of some of those countries staring default in the face.

The second key factor in the global economic recovery, or lack of it, has been the financial mess within the eurozone.

The European Central Bank (ECB), working alongside the central banks of the 17-member states of the eurozone, have been too slow to react to the debt crisis over 2011 and have constantly been playing catch-up, despite several crucial summits over the year.

This has seen the markets respond negatively towards this inertia and subsequent bailouts have required strict austerity measures, which as we have seen in the UK, are not looked on in a favourable light by the local populous, as well as being hard to implement.

The knock-on effect of this has seen the euro, which has been pretty strong since 2007, depreciate against most major currencies since the summer. While a cheaper currency is a good thing for exporters, importers looking to bring in goods from economies linked to stronger performing currencies, such as the USA and UK, will find it tough to buy goods and services when the dollar and sterling are performing so well.

So what’s in store for 2012? Unfortunately doom and gloom still holds centre court and we predict that the issues that we have talked about so far will continue to rear their ugly heads well into 2012.

There is a strong possibility that the euro will continue to weaken well into Q1 and Q2 and we might also see some of the periphery eurozone states start to drop out of the single currency.

If I were a betting man, Greece would be a good shout for being the first to drop out of the single currency as they will find it hard to stick to the ECB’s fiscal measures which are proving deeply unpopular at home.

Greece’s departure could also cause a domino effect with other weak eurozone states also dropping out of the single currency.

But I think it’s incredibly important to note that we don’t see the euro completely collapsing any time soon – so there’s no need to panic. There appears to be the political will to keep the single currency project alive and with weaker countries dropping out, the remaining countries will see a reverse in fortunes and could actually see the euro strengthen again.

Closer to home, we see sterling maintaining its current position as being one of the stronger currencies. While a strong pound is an advantage for importers, taking advantage of being able to bring in cheaper goods, it will be expensive to export British goods - especially to the eurozone – which raises further concerns about the UK’s trade deficit.

Considering our high debt levels and the fact that everyone wants to see a weaker pound, we might see further Bank of England (BoE) intervention to try and weaken sterling, as well keeping interest rates at a record low of 0.5%.

Another question at the front of peoples’ minds is whether we will experience a recession in 2012. While the markets have responded warmly to the Government’s austerity measures and growth is flat rather than negative, all of this will be blown out of the water if there is a recession in the eurozone, an event which is more than likely.

The eurozone is our most important trading partner and if there is recession on the continent, this will interrupt trade flows and hinder the amount of business UK companies can carry out.

Nonetheless, if we do see the weaker eurozone nations drop out, the consequences will be only felt by the UK in the short-term and we will eventually see a balancing act where the eurozone will regain its strength.

In terms of currency and considering that our outlook for both the global economy and the eurozone debt crisis is negative, as a final thought, we see the euro losing ground against both the dollar and sterling in 2012. Additionally, the dollar should outperform the pound in risk averse circumstances next year and maintain its position as a safe-haven currency.

Produced by Steven Fifer, Caxton FX

Richard Driver, Analyst There was huge demand for the ECB’s cheap three-year loans to European banks -the almost €500bn figure was double what was widely anticipated. The euro rallied briefly, until the market came to its sense and concluded a greater need to take loans is hardly confidence-inspiring. The euro subsequently came under a great deal of pressure. Today’s session brings some UK current account data, the final quarterly GDP figures from the UK and the US, which are not expected to be revised. These figures are unlikely to trigger much volatility, and safe-haven currencies will probably be preferred.
STERLING/EURO: Sterling made the move above the psychological €1.20 level yesterday as market fails to see bright side of ECB lending. The ECB’s €489bn tender to Europe’s banks has failed to trigger a euro rally. There is scepticism as to whether European banks will use the additional funds to purchase Italian and Spanish bonds. They seem more likely to sit on the extra capital and protect themselves. Yesterday’s MPC minutes revealed there is plenty of support for further QE in February, but this is to be expected. The growth outlook for the UK economy is flat in the first two quarters of next year, though there are hopes for a pick-up in the second half of 2012. Today’s finalised third quarter UK GDP figure was revised up to 0.6% from 0.5%, this pair is trading at €1.20 and there is scope for another upward move.	FORECAST
STERLING/US DOLLAR: US stocks are trying to recover at present, which is taking funds away from the US dollar.  The S&P stock index gained by 3.0% yesterday, funded to a large extent by US dollar. US data again ticked up in the form of improved existing home sales (though not by as much as hoped). Finalised US third quarter GDP is expected to remain at an annualised rate of 2.0% this afternoon. Sterling is trading up above $1.57 this morning despite rating agency Moody’s hinting that the UK’s AAA credit rating is vulnerable to downgrade. If this were to come to fruition, sterling would surely take a hit, but for now the market has turned a blind eye.	FORECAST
EURO/US DOLLAR: A volatile day’s trading saw this pair climb to $1.32 before dipping almost two cents lower, as market concerns over eurozone bond yields persist. How eurozone bond yields are going to be brought down in the short-term was neglected at the EU Summit earlier this month, and yesterday’s ECB loan tender may have been an attempt to fill this void. European banks need to increase their capital ratios by the middle of next year in line with the Basel III criteria, so there is a good chance that yesterday’s high demand will be used for this, rather than to bring eurozone bond yields down. The euro is trading up at $1.31 thanks to a positive start for European stocks. This level looks a little high and could be corrected lower.	FORECAST
STERLING/AUSTRALIAN DOLLAR: Sterling lost considerable ground against the aussie dollar in risk-positive trading conditions. Asian stock indices rallied last night by 1.5-2.0%, and took the aussie dollar with it. The aussie dollar rocketed back up through parity against the US dollar as a result. The ECB loan story is the key factor driving this improvement in global investor confidence and this relief rally looks to have some more legs in it yet. Sterling is trading down at 1.5450 against the aussie dollar, and we are likely to see the pound remain under pressure today as well.	FORECAST
STERLING/NEW ZEALAND DOLLAR: A volatile session saw this pair edge higher as regional market confidence dried up, though kiwi GDP data was impressive. Appetite for the kiwi was weaker yesterday, but the third quarter New Zealand growth figure beat expectations to the upside, ticking up to 0.8% from Q2’s 0.1%. The strong showing can be put down to this autumn’s Rugby World Cup, but underlying growth was actually less impressive so the kiwi failed to rally. Sterling is trading at 2.03 this morning and although this pair has been losing ground this morning, risks are to the upside.	FORECAST
STERLING/CANADIAN DOLLAR: Strong Canadian retail sales helped the loonie trade positively against the pound. Canadian retail sales came in well above expectations, climbing to an eight month high. Oil prices also continuing to climb, as are US stocks, which all played into the hands of the loonie yesterday. Taking a longer-term view of the Canadian dollar’s performance in 2011, it has actually been one of the worst performers, largely down to a US economic slowdown and worsening eurozone crisis. Sterling has lost ground to risky currencies in early trading but we should see a rebound as the session progresses.	FORECAST

Richard Driver, Analyst Markets turned remarkably positive yesterday in light of a positive German business climate data and a successful Spanish debt auction. Global stocks rallied and dragged riskier currencies with them, leaving the dollar on the back foot in mid-week trading. The MPC minutes have been released this morning, revealing a unanimous vote in favour of holding the UK interest rate at 0.5% and leaving the Bank of England’s asset-purchasing programme (QE) unchanged at 275bn. The door was unsurprisingly left open to further QE.
STERLING/EURO: Sterling continues to creep higher against the single currency, but ECB loan offer could help the euro in the short-term.   The ECB today will be offering three-year loans to struggling European banks in a bid to ease the liquidity squeeze that is building as a result of the debt crisis. Demand is expected to be high for the ECB’s loans and market tensions surrounding an impending credit crunch have lifted considerably in the past session. This morning’s MPC minutes revealed UK policymakers are firmly in wait and see mode. The Bank of England’s Broadbent yesterday reminded investors that the UK economy is in a painful period of transition, but cautiously asserted that our banks are better equipped to cope with financial shockwaves than before the financial crisis. Sterling is approaching the €1.20 mark this morning but the euro may have a stronger day in light of positivity surrounding the ECB’s liquidity commitments.	FORECAST
STERLING/US DOLLAR: The US dollar is weakening off fairly aggressively in risk-positive conditions, but our preference for the greenback remains unchanged. Sterling has climbed by almost two and a half cents from Monday’s closing price, which is a reflection of the considerable injection of risk appetite we saw yesterday. US housing data added to the positive sentiment on display yesterday, and more is likely to come this afternoon. We may see risk assets continue to recover today, after many sessions under pressure, which is likely to keep the US dollar on the back foot. Still, even with the ECB’s three-year loan offer, we favour the US dollar as the prime safe-haven in an uncertain start to 2012. Nonetheless, sterling is trading up towards $1.5750 this morning, which represents a one-month high and a good rate to buy the dollar.	FORECAST
EURO/US DOLLAR: The euro is trading a cent and a half higher against the US dollar as Spain enjoys a positive bond auction.   Yesterday’s Spanish bond auction drew solid demand and the ECB’s loan offer is only likely to help bond yields in the eurozone, with banks more willing to buy peripheral debt. Yesterday’s strong German business climate survey also helped the euro, and a German consumer climate was also better than expected, all suggesting that the German economy could bounce back from here. Global equities rallied and the euro predictably tracked these gains, climbing to a much more comfortable level of 1.3150 against the US dollar. Further gains seem fairly likely as sentiment continues to improve.	FORECAST
STERLING/AUSTRALIAN DOLLAR: Sterling lost considerable ground against the aussie dollar in risk-positive trading conditions. Asian stock indices rallied last night by 1.5-2.0%, and took the aussie dollar with it. The aussie dollar rocketed back up through parity against the US dollar as a result. The ECB loan story is the key factor driving this improvement in global investor confidence and this relief rally looks to have some more legs in it yet. Sterling is trading down at 1.5450 against the aussie dollar, and we are likely to see the pound remain under pressure today as well.	FORECAST
STERLING/NEW ZEALAND DOLLAR: The kiwi dollar made some hefty gains despite a widened NZ current account deficit. Data last night revealed that New Zealand’s current account deficit worsened to its worst level in a year. However, as usual international developments proved far more important and the kiwi dollar joined in on the rally in riskier assets that we saw yesterday. Sterling is trading down below 2.03 this morning, and a bounce back may have to wait for today and perhaps even this week, but sterling should return to higher levels before long, with major concerns over the eurozone likely to resurface.	FORECAST
STERLING/CANADIAN DOLLAR: Sterling erased some early gains against the loonie as US stocks rallied on positive headlines from the eurozone and the US economy. The Canadian dollar recouped some ground as the eurozone’s short-term situation improved. Further positive signs from the US economy, this time in the form of the housing market, also added to the improved outlook for demand for Canadian exports. Still, this is a less volatile pair than GBP/AUD or GBP/NZD, and sterling’s losses were capped. Sterling continues to trade close to 1.61.	FORECAST

Investors finally punishing the euro

Euro suffers heavy losses

The euro suffered heavy losses last week as the markets set about pricing in a lack of any real or satisfactory progress at the Dec 9th EU Summit, and the near certainty that 2012 will be another very rocky year for the single unit. Eurozone downgrades are currently the number one driver of market fears at present. Moody’s has cut Belgium’s rating, Fitch has asserted that a comprehensive solution to the debt problem is “technically and politically beyond reach” and has proceeded to place major eurozone nations such as Italy and Spain on a negative watch. Action from Standard &Poor’s seems highly likely before long and it could well be France’s triple-A rating in the firing line.

The euro is trading at an eleven-month low against the pound and the US dollar. Eurozone bond yields remain under pressure, the markets are clearly frustrated and it is quite clear that the rating agencies are too. In this environment, we see the euro making a difficult start to 2012.

Eurozone finance ministers agreed yesterday to bolster the IMF’s resources by €150bn. The market will always welcome greater commitment to support the eurozone’s struggling nations by increasing available aid, but with the decisions contingent upon the parliamentary approval of individual member states, the euro has failed to gain as a result. Besides in reality, €150bn does little to change the complexion of the eurozone crisis.

UK data disappoint further, but sterling unperturbed

Last week’s UK growth figures added to an already gloomy economic picture. UK unemployment is now at a fresh 17-year high and retail sales contracted by 0.4% in November. Still, sterling was largely unaffected by these figures.

Rating agency action n the UK’s triple-A status is the key risk as far as sterling is concerned. The market has come to terms with low growth and high debt in the UK, but if these two factors worsen sufficiently to prompt rating agencies to downgrade UK debt, then sterling could well lose the quasi-haven status it has been benefiting from in the past few months. If UK gilts lose their appeal, then so too will sterling to a certain extent.

The MPC minutes are released this Wednesday, and expectations surrounding it are fairly muted. The MPC will remain in wait-and-see mode until it steps up it QE programme in February and there are not too many talking points besides the UK economy’s uncertain outlook.

Sterling is trading at €1.1950 and €1.20 before the year’s end is by no means out of reach. Against the US dollar, again sterling is looking decidedly more vulnerable but having climbed up towards $1.57 today, is actually holding up pretty well in what are distinctly risk averse trading conditions. The euro is desperately holding on to the $1.30 level but we continue to favour the safety of the US dollar, particularly with S&P liable to make their voice heard in coming sessions.


End of week forecast
GBP / EUR 1.1975
GBP / USD 1.56
EUR / USD 1.3025
GBP / AUD 1.57

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

Richard Driver, Analyst No major moves were seen yesterday and it was broadly a Monday of range-bound trading. Many books will now be closed for the holidays but there is still scope for some movements, most likely in favour of safer currencies like the US dollar and the pound. The euro held up reasonably well despite uninspiring comments from ECB President Draghi to the effect that more aggressive bond purchases will not be adopted. Today’s session brings some CBI realized sales data, but aside from this the coming session if fairly data light.
STERLING/EURO: Sterling has enjoyed another push higher this morning, with ECB President Draghi disappointing the markets. The outlook for controlling eurozone bond yields was dealt a blow yesterday as ECB President reiterated his stance on refusing to step up bond purchases; he clearly believes it is not in the ECB’s mandate to do so. He also reminded investors that eurozone banks would have a tough 2012 and that growth would be slow to recover. On a mildly more positive note, eurozone finance ministers agreed to boost IMF capacity by €150bn in bilateral loans, though the UK abstained. The loans will still have to be approved by the relevant national parliament, which is by no means guaranteed. This explains why any market positivity has been suppressed.  Sterling is trading up at a fresh multi-month high above €1.1950 this morning, as the march towards €1.20 continues.	FORECAST
STERLING/US DOLLAR: Sterling is even rallying against the US dollar this morning, perhaps by a better than expected UK consumer confidence figure. A consumer confidence gauge ticked up last night, perhaps easing a little of the poor sentiment towards the struggling UK economy. There may also have been a sterling-positive response to the UK’s refusal to get involved with yesterday’s addition to the IMF’s resources. On a positive note for the US dollar, Fed policymaker Lacker yesterday argued against the case for further monetary stimulus (QE) in the US. If the US economy can avoid further QE, then this removes one of the key long-term downside risk factors for the US dollar. Sterling is trading positively up above $1.5550.	FORECAST
EURO/US DOLLAR: The euro is perhaps surprisingly holding up around the $1.30 mark but a downside move is bound to come. News of a bolstered IMF fund failed to see the euro rally yesterday and we should hardly be surprised. We have heard these announcements before, only to see agreements fall apart or get rejected at national level. One thing is clear, yesterday’s IMF agreement is certainly not a game changer, as reflected in the flat trading in this EUR/USD pair. The euro is trading comfortably above $1.30 this morning, German consumer climate data provided a much needed upside surprise this morning, but euro gains may be short-lived.	FORECAST
STERLING/AUSTRALIAN DOLLAR: Sterling crept up against the aussie dollar but gains were capped in light of less dovish than expected RBA minutes. The minutes from the Reserve Bank of Australia’s recent meeting were less dovish than expected last night. Further rate cuts, in addition to the two recent 0.25% cuts we have seen in the past two months, were not indicated, which is supportive of the aussie dollar. However, the RBA’s policy will almost entirely be dictated by events in the eurozone, and if our fairly rocky outlook on the debt crisis plays out, their hands may be forced on further interest rate cuts. Sterling is trading up at 1.56 and if sterling can continue its current positive tone, then further gains may come today.	FORECAST
STERLING/NEW ZEALAND DOLLAR: This pair saw some choppy trading, the market remains very nervous ahead of S&P’s almost inevitable downgrade action.    Sterling ticked higher against the risky kiwi dollar despite a slight recovery in Asian stocks. Sentiment remains pretty weak at present, with investors nervous about S&P’s possible eurozone downgrades. The coming evening session brings some New Zealand current account data, but the kiwi dollar is likely to be pushed and pulled around by international headlines. This pair is trading at 2.0450 and further gains are possible.	FORECAST
STERLING/CANADIAN DOLLAR: Sterling crept a little higher against the Canadian dollar, which was hurt by some pretty significant losses in US stocks. US stocks made a poor start to the week and the price of Brent crude fell as low as $1.02 per barrel yesterday, $8 lower than last week’s high. The loonie lost a little ground to sterling as a result, despite some positive Canadian growth data. It is tricky to see appetite for riskier currencies to really bounce back in the coming holiday period. Sterling is trading above 1.61 and this pair should remain well-supported if sterling can build on its strong start to today’s session.	FORECAST

Kim Jung-il's death hurths the South Korean won

The South Korean won has fallen to a two-month low against the dollar and the pound as a result of the geopolitical uncertainty that Kim Jong-il’s death has left behind.

The won tracks the performance of local equities to a large extent, and the KOSPI is down by almost 3.5% today.

The approach that youngest son Kim Jong-un takes on foreign policy is the most immediate concern, because the truth is we know nothing about this character and how he will respond to his newfound power.

The truth is only time will tell on an issue like this, but in the short-term it only adds to the reasons to get out of the won and target safe-haven assets such as the US dollar.

The eurozone situation is showing few signs of progress and market frustrations have finally taken their toll on the single currency.

The won has been the second-worst performing currency after the Indian rupee since the summer. Global risk appetite is likely to remain hemmed in for a long time to come and this renewed regional uncertainly only adds to what was already a negative 2012 outlook for the won.

Richard Driver

Senior Analyst – Caxton FX
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Richard Driver, Analyst The sell-off in the euro and other risky assets took a breather yesterday in light of a healthier Spanish bond auction and some improved growth data from both the eurozone and the US. UK retail sales were poorer than expected, but the high street enjoyed a good couple of months prior and could well bounce back in December. Today’s session is far quieter in terms of scheduled announcements. Sterling has come through this week’s UK data (unemployment and retail sales) unscathed and looks well set to continue its uptrend against the euro. STERLING/EURO: The pressure came off the euro a little yesterday as Spain enjoyed a successful bond auction. UK retail sales came in worse than expected yesterday, contracting by 0.4% compared to October. On the upside, September and October’s figures were revised up and looking at the past three months as a whole, we’ve not seen such strong retail sales since August 2010. The market is convinced the UK is heading into a gloomy 2012, but sterling was largely unaffected. Spain managed to attract sufficient suitors at a bond auction yesterday to ease contagion fears somewhat, but this will be temporary. Eurozone growth, whilst remaining in contraction outside of the services sector, came in above expectations yesterday to help the ailing euro. Sterling continues to trade above €1.19. FORECAST STERLING/US DOLLAR: The dollar’s outperformance halted yesterday as news was a little more positive and stocks gained. US manufacturing data was excellent yesterday and triggered some gains in US stocks, taking funds away from the US dollar. US growth is pretty much the only positive story in the market at present and it was enough to lift the mood yesterday. We are still looking for a lower GBP/USD pair, particularly with threat of eurozone debt downgrades continuing to alarm investors. Sterling continues to trade at $1.55 this morning. FORECAST EURO/US DOLLAR: This pair continues to hover above eleven month lows, and a sustained move below $1.30 only looks to be a matter of time. Some of the Asian sovereign buyers that have propped up the euro all year are now turning into sellers, which is helping to pull the rug out from underneath the single currency. The euro is having its worst week in three months in the wake of last Friday’s disappointing EU Summit. This pair is trading at $1.30 this morning, the euro continues to look vulnerable and unable to sustain any real bounce. FORECAST STERLING/AUSTRALIAN DOLLAR: More positive headlines improved risk appetite yesterday, which helped the aussie recoup some ground. Sterling ceded a cent to the aussie dollar as market confidence enjoyed a moderate bounce yesterday in light of some strong US manufacturing figures and a successful Spanish bond auction. Another sell-off in risk can only be around the corner though, with sentiment so incredibly fragile at present. Sterling is trading above 1.55 and its hard to see risk appetite building further today, which should help sterling bounce back. FORECAST STERLING/NEW ZEALAND DOLLAR: Sterling lost two cents against the kiwi dollar thanks to an impressive Asian session. Asian equities enjoyed a rare session in the green last night, which boosted appetite for the kiwi dollar. The outlook for the kiwi remains pretty grim as far as we are concerned though, based on a fairly pessimistic view of eurozone debt crisis progress. Next week brings some important data from New Zealand, the highlight being the quarterly GDP figure on Wednesday night. For now though, this pair trades at 2.0450. FORECAST STERLING/CANADIAN DOLLAR: The loonie benefited from further good news from the US economy, but markets are still too nervy to see the loonie rally. US economic growth really is picking up as 2011 draws to a close. The pickup was anticipated but it has come later than expected. Canadian domestic data was also strong yesterday, which added to positive sentiment. Sterling is trading a little lower at 1.60 this morning and the outlook remains positive for sterling against riskier currencies.   FORECAST

UK unemployment data better than expected but hardly to be celebrated

Today’s monthly UK employment figures for November were seemingly encouraging, revealing far fewer jobless claimants than expected, whilst the UK unemployment rate avoided a further rise and remained at 8.3%. The UK now has 2.64 million unemployed.

Only three thousand people were added to the jobless list, against expectations of a sixteen thousand increase. This is positive but figures such as these do little to change the overall picture of a gloomy economic outlook here in the UK.

On the face of it, the figures suggest that the labour market may not be as bad as anticipated moving forward. However, we still believe conditions in the labour market will continue to deteriorate looking ahead to 2012.

Government austerity measures are taking their toll on employment numbers and will continue to do so for many months to come. The private sector is failing to pick up the slack left by private sector cuts and the picture for UK youth employment is looking very poor indeed, with the figure alarmingly up at 20%. Wage growth is also down, which is no surprise, but at least consumer inflation is coming down (down to 4.8% in November).

The risks of another UK dip into recession are ever-increasing and today’s employment numbers do little to indicate otherwise. UK households will remain under pressure over the next year and circumstances are could well worsen before they improve.

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

Weekly Round-Up: Markets are punishing the euro

EU Summit fails to satisfy the market

Movements in the exchange rates yesterday indicated a clear dissatisfaction with the decisions (or lack thereof) made at last Friday’s ‘crunch’ EU Summit. Various commitments were made, notably in the form of a new fiscal compact that will usher in tighter budget deficit rules. This will guard against future sovereign debt crises cropping up in the future, but it doesn’t do a great deal to solve, or ease concerns surrounding the current and worsening eurozone debt crisis. The European Stability Mechanism (the permanent bailout fund) will be activated a year early in mid-2012 – another longer-term measure. A further €200bn of aid will also be made available – positive but hardly the sort of ‘bazooka’ style measure that has been mooted of late.

The European Central Bank has refused to step up its bond-buying and Italian bond yields have risen as a result. This reveals what the market thinks of the decisions made at last week’s Summit. Moody’s has joined fellow ratings agency Standard & Poor’s in warning of possible eurozone debt downgrades. Moody’s cited “an absence of decisive policy measures.” Decisive is the operative word here and the adjective that continues to elude EU leaders. With all three of the major rating agencies posturing, further eurozone downgrades are looking likely - the euro appears more vulnerable than ever.

The euro guarded against losses in the immediate wake of the EU Summit, but it has made a terrible start to this week. The market has had to come to terms with, and is pricing in, the fact that this eurozone crisis is going to roll on for months to come. This should not come as too much of a surprise, but expectations of ground-breaking progress really had reached new levels in the past fortnight. Accordingly, GBP/EUR has posted new nine-and-half month highs up towards €1.1850, and the euro has crashed towards fresh lows towards 1.3150 against the US dollar. The euro has fallen and fallen hard, and our pessimistic view of EU political stalling is finally being reflected in the exchange rates. In addition to the headline fiscal issues plaguing the euro, data this week is likely to highlight the economic issues the eurozone is facing. Eurozone manufacturing and services data is likely to stoke prevailing fears of another eurozone recession on Thursday.

Sentiment towards the US economy improving

Away from the furore surrounding the EU Summit, US consumer sentiment data hit a six-month high on Friday, providing further indication that the slowdown we have seen across the Atlantic for much of this autumn may well just be temporary. Caution will persist however, particularly with US retail sales figures disappointing today.

The picture is gloomier here in the UK; employment (Wednesday) and retail sales data (Thursday) provides plenty of scope for some sterling negativity as the week progresses.

Sterling is trading impressively above €1.18, and the euro looks hard-pushed to rebound in the current low-confidence environment. Key options levels at $1.3250 on the EUR/USD pair have now given way and safer currencies such as sterling and the US dollar have made an excellent start to the week. We can expect there to be further volatility this week and it certainly won’t be one-way, but we do expect the current risk-off climate to favour safer currencies and punish the euro. Currently trading at $1.56, sterling has held up pretty well against the US dollar, but a heavy EUR/USD pair should limit any upward sterling moves.

End of week forecast:
GBP / EUR 1.1850
GBP / USD 1.5550
EUR / USD 1.3125
GBP / AUD 1.5450

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

Caxton FX's Monthly Report: GBP/EUR, GBP/USD

November was an extremely risk averse month as concerns intensified surrounding a global economic slowdown and in particular the worsening debt crisis in the eurozone. Former Greek PM Papandreou spooked the markets by calling a referendum on its latest bailout agreement (which he later cancelled and subsequently resigned from office). Berlusconi was also toppled; making way for a technocratic Italian government tasked with implementing the austerity measures and reforms necessary to bring their borrowing costs down from their current highs (a fresh euro-era record of almost 8% was set recently). Encouragingly, the new Italian PM has at least got the ball rolling with a €30bn austerity package, but the markets will reserve judgement until they see some results.

Bond yields throughout the eurozone (including German bunds, shockingly) have been on the rise and we have seen further debt downgrades as a result. These symptoms of debt contagion, taken in tandem with some ominous looking regional growth data, have seen risk appetite dry up and the euro has come under some intense pressure.

As far as sterling is concerned, an increasingly gloomy UK economic outlook and firm expectations of further quantitative easing are not weighing too badly. The strong safe haven appeal of UK gilts is triggering a steady inflow of investment into sterling, and the uncertain global outlook should see sterling well-supported against riskier currencies over coming weeks and months, though not against the safer US dollar.

Sterling/Euro

With sterling reaping the rewards of a quasi-haven status amid intensifying eurozone concerns, this pair has consolidated late October’s three cent spike up from €1.1350. Sterling reached an eight and a half month high against the euro in mid-November, and although the rate has dropped a little lower in the interim, we are still bullish on the prospects for this pair.

We saw further evidence of debt contagion in November, further downgrades, and fresh record high bond yields. Italy recently approached the 8.0% level on 10-year bond yields, a clear indicator that Germany needs to allow the ECB to be more active in the European bond market.

Growth data from the eurozone has been awful in recent weeks, and forward-looking data is pointing to what is likely to be a eurozone recession in coming months. Accordingly, we are likely to see another interest rate cut from the ECB on Thursday, which will bring the eurozone base rate down to 1.0% (probably euro-positive in the current environment). Further liquidity measures from the ECB are also likely as they seek to further ease the pressures being felt by European banks.

Progress has been made on the issue of the European Financial Stability Fund, which will be able to guarantee up to 30% of the bonds of struggling eurozone states but just how much its capacity will be expanded remains unknown. The International Monetary Fund’s involvement in addressing the region’s problems remains uncertain, recent news suggests that the IMF will lend to weaker nations through the ECB.

Eurozone finance ministers are targeting the EU summit this Friday (December 9th) to produce some sort of plan for ‘closer fiscal union.’ Merkel and Sarkozy have come up with a plan to enforce fiscal discipline in eurozone states, but whether this is accepted at the EU summit remains uncertain. The market has been repeatedly let down by these deadlines and we wouldn’t be surprised if EU leaders disappointed once again. The pressure on EU leaders to deliver has never been so great, particularly in light of Standard & Poor’s warning of a downgrade to fifteen eurozone states, including AAA rated France and Germany. This threat has seen risk appetite dry up somewhat and has put the euro on the back foot.

The UK economy is slowing down, unemployment is extremely high and growth figures are in decline. The Bank of England is likely to ramp up its quantitative easing programme in February next year as a result. However, sterling’s safe-haven status, via the appeal of the UK’s AAA-rated gilts, has come to the fore in recent weeks and we see this continuing to support sterling moving forward unless we do indeed head back into recession. For the next few weeks at least, UK government bonds should remain in demand.

It is very difficult to anticipate the ability of EU leaders to reach agreement on a long-term road to solving the debt crisis. Steps towards fiscal union does seem likely as the pressure heaps up, but eurozone finances will remain in trouble for a long time to come. On a very simplistic view, we continue to favour sterling over the euro based on the bet that progress on the debt problem will be slow and fears of economic meltdown will continue to impact on the single currency.

Sterling/US dollar

Sterling has found it tough going against the US dollar in the past month; falling stocks and rising eurozone bond yields have played into the hands of the safety of the greenback. EUR/USD fell ten cents from $1.42 in the four weeks since late October, and although we have seen a small bounce up to the current rate of $1.34, we remain bullish on the US dollar. This major downside move has therefore weighed on GBP/USD in recent weeks.

US debt came back into the headlines in November, with a Congressional ‘supercommittee’ unable to reach an agreement on how to reduce the government’s massive debt. This issue could very well come back to haunt the dollar next year, particularly if it results in further debt downgrades of US debt to follow Standard & Poor’s action in the summer. Still, for the next month this is unlikely to be a problem for the dollar and market focus is likely to remain on the eurozone.

US growth figures have picked up a little of late, and there have been one or two noises out of the Fed suggesting that the case for further quantitative easing may be weakening. Only time will tell here, Fed President Bernanke will not hesitate to add stimulus if the US economy takes another turn for the worse but again, the dollar looks safe for now and if anything, the outlook has improved a little.

Taking the shine off the dollar’s recent performance has been the positive news of coordinated liquidity measures from several global central banks. This has taken the pressure off Europe’s struggling banks. Judging by the rumours out of the eurozone and from Merkel and Sarkozy’s recent meeting, there are growing signs of progress but there will be no quick fix, regardless of what is announced at Friday’s EU Summit. As Standard & Poor’s recent threat of a blanket downgrade shows, there will be plenty more panic headlines to come. This should see the dollar remain on the front foot against sterling in the coming weeks and months.

End of month forecast:

GBP / EUR 1.1750
GBP / USD 1.5550
EUR / USD 1.32

Richard Driver
Analyst – Caxton FX


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ECB rate cut could be positive for the euro

There have been plenty of positive developments for the eurozone of late. The IMF looks increasingly likely to be a third line of defence and it has been agreed that the European Financial Stability Fund will be able to guarantee up to 30% of troubled eurozone state’s bonds.

Most importantly, six major central banks last week announced coordinated liquidity measures to take the pressure out of the global, and particularly the European banking system. The unified emergency response has given appetite for riskier assets such as the euro a real shot in the arm.

We have also seen some progress in Italy, with new PM Mario Monti announcing a fresh 30bn austerity package, which should serve to appease the markets for the time being.

All eyes now turn to the Thursday’s monthly interest rate decision from the European Central Bank. A higher interest rate is typically positive for a currency and a rate cut a distinct negative. However, circumstances in the eurozone are anything but normal and a second consecutive monthly rate cut to the ECB’s base rate (currently 1.25%) could well be taken as sign that EU officials understand the gravity of the region’s problems and are acting proactively and assertively. Other liquidity measures are also likely to be announced by ECB President Draghi.

Friday brings a key EU Summit which has been hyped as ‘make or break.’ This is a bit overdone but there are plenty of signs that we will see some decisions made on fiscal union amongst eurozone states. Headlines today reveal that Merkel and Sarkozy have reached an accord on eurozone budgets and potential sanctions. The markets have been disappointed before and whilst investors are likely to hope for the best while the positive headlines flow, but many will be preparing for the worst.

Conditions in the US improve but not so for the UK

US economic figures have broadly taken a turn for the better in the past fortnight, suggesting the US economy can have a stronger 2012 than has recently been indicated. This has added to the improved sentiment in the market in recent sessions.

UK data has been less impressive; November’s UK construction and manufacturing figures revealed a further slowdown and have done little for the prospects of final quarter growth. Services sector growth enjoyed a minor uptick but levels are well off what we were seeing earlier in the year.

George Osborne was very negative indeed about the prospects for the UK economy in his Autumn Statement. The Bank of England will be sitting on the sidelines until February as far as more quantitative easing is concerned, so we will just have to hope that activity picks up in the next few months.

Sterling is trading at €1.1650, off its recent highs above €1.17 in light of an upturn in global risk appetite. Against the US dollar, sterling is trading more robustly up at $1.57, having bounced of lows of $1.54 in late November. We don’t see any major moves in the GBP/EUR pair this week but we may see EUR/USD continue to head higher as equities recover. This should keep GBP/USD well-supported, regardless of the growing concerns surrounding the UK economy.

End of week forecast
GBP / EUR 1.16
GBP / USD 1.5750
EUR / USD 1.36
GBP / AUD 1.50

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