US dollar makes a strong
start to 2013
The US dollar made a horrible finish to 2012 but the
currency has enjoyed a resurgence in the first few sessions of 2013. The Fed
has given the greenback a much needed helping hand by indicating that it has
limits in sight with respect to QE3. The Fed is very unlikely to conclude its QE3
operations in the first half of this year but a 2013 finish is very much on the
cards, which is all good news for the USD.
The US fiscal cliff was averted by Congress last week
and this sent global equities soaring, though the response in the foreign
exchange markets was markedly more cautious. The dollar seems to be benefiting
from lingering nerves over the need for the US to once again raise its debt
ceiling and the risk of another US debt downgrade. Also aiding the dollar was a
large degree of profit-taking on the EUR/USD pair’s climb up to $1.33.
At $1.63, sterling was looking very expensive at the turn
of the year and has indeed been pulled back down to the $1.60 area by this recent
dollar rally. Support at this level appears to be pretty robust however, which
may give this pair some more time above the threshold (though we still believe
it to be “borrowed”). However, we do note significant risks of another downward
slide.
UK
growth data disappoints to weigh on GBP
It’s not been a very happy start of the year as far as
UK economic figures are concerned. The UK manufacturing sector saw some
unexpected growth in December, the most in nine months, but the news from the
construction sector and in particular the services sector was much less
positive. The worst contraction in the UK services sector since the middle of
2009 is likely to ensure a negative GDP figure for Q4 2012, which is announced on
January 24. We are not expecting the UK economy to continue contracting throughout
2013, though make no mistake the prospects of a significant upturn are pretty
bleak.
The Bank of England meets this Thursday (Jan 10) and
despite growth concerns we are expecting Mervyn King & Co to opt against
the option of another dose of quantitative easing. Growing signs of success
within the BoE/Government’s Funding for Lending Scheme, whereby bank lending is
incentivized, are likely to be sufficient for most MPC members to hold fire on
their QE votes.
End of week forecast
|
GBP /
EUR
|
1.2350
|
|
GBP /
USD
|
1.6050
|
|
EUR /
USD
|
1.30
|
|
GBP /
AUD
|
1.5350
|
|
|
|
Sterling is still at a very respectable rate against the
US dollar and exchanging at current levels is still a decent result. Against
the euro, this is far less the case. Yes, the rate has bounced off its 8-month
lows around €1.2150, but it is still hard to view these levels of €1.23 as
attractive to buy euros. We do maintain our outlook for a weaker euro this year,
which should see a return to the €1.25 level, though we may well have to be
patient amid such disappointing UK economic figures. For January trades, this
may be close to as good as it gets with a poor UK GDP figure on the horizon.
Richard Driver
Currency Analyst
Caxton FX
