Caxton FX Weekly Outook: GBP/EUR, GBP/USD

Triple-dip UK recession should be avoided

The past week’s data releases enable us to make an assessment of the UK economy’s overall performance over Q1. The March PMI figures revealed further contraction (albeit at a slower pace) within the UK manufacturing and construction sectors. Thankfully, the UK services sector beat expectations for a third consecutive month with the best figure since last September. The PMI data points to a Q1 UK GDP figure of 0.1%, hardly the sort of figure to trigger a sterling rally but it will still represent a major bullet dodged. Tomorrow afternoon will bring the release of a notable GDP estimate, ahead of the official release on April 25.

What the market will want to know is what this all means as far as the Bank of England’s monetary policy is concerned. Our bet is that a 0.1%, or similarly anemic growth figure, will be sufficient to convince a majority of MPC members to vote in favour of additional quantitative easing. We think there is a good chance of this happening next month, which will be a threat to the pound.  It’s a pretty quiet UK calendar this week, with tomorrow’s UK manufacturing and industrial production figures for February attracting perhaps the most interest. Some growth is expected, though not enough to recoup January’s awful showings.

US data disappoints and the dollar feels the heat

The all-important monthly US labour report has put the US dollar on the back foot by coming in way below expectations. The weakest jobs growth in nine months has had the market, us included, paring back expectations of a QE3 wind-down this summer. This lack of progress in the US labour market will swing the balance in favour of Bernanke and his fellow pro-QE doves. On the whole, this jobs report does nothing to change the fact the US recovery is far out pacing those of the UK and the eurozone but it is a notable development nonetheless.

We will get some more insights as to the Fed’s policy outlook when its meeting minutes are released on Wednesday night, while Friday brings some important US figures in the form of consumer sentiment and retail sales updates.

Euro rallies but Draghi’s comments point to weakness down the line

There was no interest rate cut from the ECB last week but Draghi’s press conference revealed a distinct shift in dovish rhetoric. There was “extensive discussion” as to a rate cut this time around and it seems as though Draghi has given up on his prediction of a stabilization in the eurozone recession in H1 2013, before a recovery in H2. Downside risks to growth were emphasized, as Draghi finally woke up to the appalling data that has continued to flow out of the eurozone throughout 2013.

End of week forecast

GBP / EUR	1.1675
GBP / USD	1.5375
EUR / USD	1.31
GBP / AUD	1.4850

Sterling is trading up at €1.1730, well down from its recent highs of €1.1850. The pound’s disappointing session today could well set the tone for a poor week, particularly with the euro making decent progress across the board. A weaker dollar is helping matters as far as the euro is concerned. From our standpoint, there have been enough debt crisis reminders (from Portugal most recently) to keep any major move for EUR/USD above $1.30 in check. We are still confident of lower levels for this headline pair in the coming weeks. GBP/USD has a decent chance of climbing up to $1.54 in the sessions ahead, which would represent a decent opportunity to buy USD, given the bigger picture of UK economic underperformance.

Richard Driver
Analyst – Caxton FX


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