Weekly Analysis - Sterling holds strong, Euro proves resilient, but the US and Australian Dollars fall. This week will be heavy with US and UK data and should be relatively volatile. Sterling has the momentum, but positive US data could well reverse those gains.

GBP – In the UK, The last week brought relatively good news for the pound. The Bank of England meeting minutes revealed a positive revised growth estimate for the UK on Wednesday, and Retail Sales m/m figures on Friday beat estimates with at least a small sign of growth. The pound has held up against most other currencies and has the momentum to push higher next week. Data to watch for this week from the UK will be the Prelim GDP q/q on Tuesday, Manufacturing PMI on Thursday, and Construction PMI on Friday.

EUR – In the Eurozone, Manufacturing data from last week and an improved PMI figure confirmed that business activity has increased overall. However, with inflation at such low levels, the Eurozone is increasingly concerned with a stronger Euro, which would further destabilize growth. Data is limited this week, but with a CPI Flash Estimate y/y figure on Wednesday, there will be a more complete picture of how prices have increased when compared to economic growth in the region.

USD – Last week, the Dollar provided some resistance to the advancing pound and Euro with positive durable goods orders last Thursday, but much will depend on the preliminary US GDP figure this coming week. This week, the all-important day will be Wednesday, as markets prepare to digest the ADP Non-Farm Employment Change, Advance GDP q/q data on Wednesday out of the US, and the FOMC will make a statement at 7pm GMT. The FOMC is also scheduled to reduce its bond buying by another $10 billion down to $45 billion this week, and with a relatively stable market, it will be easy for the Fed to proceed with this. Also, let’s not forget Thursday, as Janet Yellen will be speaking at a policy summit meeting in Washington D.C.

Canada – Canadian data will also be heavy this week, as the loonie has proved that it has had some forward momentum with positive Core Retail Sales m/m last week. BOC Governor Poloz is speaking this week on Tuesday and Wednesday will bring Canadian GDP m/m figures. The Bank of Canada has been under increasing pressure to lower their benchmark interest rate of 1% since growth has been slower than expected in the past year and the Canadian Dollar has been sliding as a result. 

Australia – Last week, the Australian Dollar was weakened significantly when Australian CPI q/q and the HSBC Flash Manufacturing PMI both came in negatively and undermined the AUD. This week, we could see a similar phenomenon, as there will be CNY Manufacturing PMI on Thursday, expected to improve marginally from a month ago. Also, there will be Australian PPI q/q expected to improve from the last quarter. The Australian dollar has been strengthening from its 2013 devaluation slide, but it seems to have stalled with poor Australian and Chinese data. This week will be an additional focal point to determine the direction of this rate.

End of week forecast

GBP/EUR – 1.2200

GBP/USD – 1.6900

EUR/USD – 1.3930

GBP/AUD – 1.8200

Nicholas Ebisch

Corporate Account Manager

Caxton FX

Weekly Market Analysis - UK Economic figures drive GBP to gains against most currency pairings, whilst the eurozone takes a more dovish tone following the World Bank and IMF meetings last weekend.

GBP
The UK unemployment rate dropped to a five-year low of 6.9% on Wednesday
which reinforced positive Manufacturing data from a week earlier. GBP/USD rose
to the highest level since 2009 in what is a clear sign of economic confidence
developing in the UK economy. This has put more pressure on the Bank of
England at their next meeting to at least discuss an interest rate rise. However,
there is not a distinct timeline for a rate increase at the moment, as the Bank of
England altered their forward guidance framework last fall to look more broadly
at economic indicators before committing to a more definite timeline. Next week,
the major events on the economic calendar are the MPC Asset Purchase Facility
Votes and MPC Official Bank Rate Votes on Wednesday, followed by the Retail
Sales m/m figures on Friday.

EUR
Mario Draghi stated in New York this last weekend after the IMF and World
Bank meetings that further strengthening of the euro would require additional
ECB intervention because of the low level of inflation in the eurozone. The
international community has overwhelmingly expressed their concern to Draghi
about the low rate of growth in the eurozone and that measures need to be
taken to boost economic growth in the region. Any instability or sign of an
economic decline in the eurozone would have negative ramifications for global
markets because of the eurozone’s central role within the global economy.
Mario Draghi has stated that if further action is taken, it will be an interest rate
cut which precedes further quantitative easing. Draghi is due to speak at a
conference in Amsterdam on Thursday and may provide more clues as to the
further action that the ECB has planned.

USD
The dollar’s performance was weakened over the last week largely thanks
to Janet Yellen making a distinction about the likelihood of an interest rate
rise. During a speech last week, the Federal Reserve chairwoman included
in her comments that there will be a ‘considerable time’ between the end
of Quantitative Easing and the first interest rate rise. This undermined her
comments from the Federal Reserve meeting on March 19th where she said that
an interest rate rise may follow as early as six months after the end of the QE
Programme. The more dovish tone from Yellen has given the Federal Reserve
more breathing room as the Fed continues to voice their concerns about the
sluggish economic recovery, rather than the need for a higher interest rate.

End of Week forecast –

GBP/EUR – 1.2250

GBP/USD – 1.6890

EUR/USD – 1.3770

GBP/AUD – 1.7900

Nicholas Ebisch
Corporate Account Manager
Caxton FX

Chinese economic growth slows, UK unemployment rate falls to a five-year low

Chinese GDP q/y figures beat estimates, but have continued to slow from where they were a year ago. Global equity markets are up on the day because the 7.4% q/y growth out of China beat analysts’ estimates. Forecasters estimated that the Chinese economic data would come in at around 7.3%, as the economy has slowed from a year earlier, but a surprise to the upside is a welcome relief for global markets concerned about the slowing growth of China. Industrial production ytd/y and Fixed Asset Investment ytd/y slowed, but retail sales y/y accelerated in the past year. China’s current GDP growth is very high when compared to most countries in the world, but it pales in comparison to the double-digit GDP growth that it enjoyed for years. Analysts and planners maintain that the world’s most populous country needs to sustain high levels of growth because of the high number of migrant workers and young population entering the job market. This puts pressure on Beijing to strategically invest in more government stimulus to stop the slide of GDP growth.

In the United Kingdom, the unemployment rate fell to 6.9% during the last month. This is the lowest the unemployment rate has been since April 2009. The UK economy continues to surprise on the upside, as the economy looks to be doing very well and ticking back to life. Sterling received a boost against most major currencies this morning when the data was released. The Bank of England announced last year that the threshold for considering an interest rate increase would be 7.0%, however they are unlikely to rush into any definite timeline. As the unemployment rate fell more quickly than expected last autumn, the Bank of England modified their forward-guidance strategy, saying that they will now consider a broader range of economic indicators to assess the overall strength of the economy when deciding whether or not to raise interest rates. Although this does step up the pressure on the Bank of England, it is unlikely that this alone will advance the timeline for an interest rate increase.

Nicholas Ebisch

Corporate Account Manager

Caxton FX

Weekly Report - Sterling feeling the resistance after a mid-week boost, ECB lays out a clearer plan in the monthly bulletin, dollar takes a beating.

UK – Although the pound is performing very well this last week, there does seem to be resistance from other currencies against the pound, which is limiting its gains. Manufacturing Data on Tuesday gave Sterling a boost, but the question is how long can it stay in the spotlight with limited data in the next week to support it? UK data throughout the week will start off with CPI y/y figures on Tuesday, followed by the Claimant Count Change and Unemployment rate on Wednesday. The house view is that Cable will most-likely retreat from its relatively high levels, as the dollar continues to slowly but surely gain strength as the Federal Reserve winds down the QE programme.

Eurozone – The ECB monthly bulletin made it clear that there was not a change in the Minimum Bid Rate at the beginning of this month because “the moderate recovery of the euro area economy is proceeding in line with the Governing Council’s previous assessment”. However, the bulletin reiterated Draghi’s points from his press conference earlier this month that the ECB stands prepared to act swiftly with monetary accommodation and lower interest rates if required. This has helped to strengthen the Euro at the end of the week. In the next week, the only major event directly affecting the Euro will be German ZEW Economic Sentiment on Tuesday. The Euro ended the week on a high note, as the monthly bulletin last Thursday, combined with positive sentiment toward the Eurozone as the result of a highly-successful Greek bond sale, allowed it to gain strength near the end of the week. However, President Draghi blamed the strength of the Euro for the low rate of inflation in the Eurozone over the weekend, and made the statement that the “further strengthening of the Euro requires further monetary stimulus”, signalling that unconventional monetary policy may not be far away.

USA – FOMC meeting minutes which were released on Wednesday evening of this last week confirmed that there was discussion about the central bank’s collective concern over the low rate of inflation. The concern was not enough to warrant a clearer timeline of when we can expect the next interest rate rise, but the market has interpreted it as a sign that interest rates will stay low for longer, undermining the USD at week’s end. During this next week before the Easter holiday, the data to watch for which will affect the dollar will be Core Retail Sales m/m and Retail Sales m/m on Monday, Core CPI m/m and Janet Yellen speaking at a Federal Reserve conference in Atlanta on Tuesday, Building Permits data and Janet Yellen speaking again at the Economic Club of New York on Wednesday, and finally, Unemployment Claims and the Philly Fed Manufacturing Index data on Thursday. Cable does seem to be at the top of the range, and barring any big surprises in the market, we should see the dollar able to pare back some of the losses it sustained last week against other currency majors.

End of week forecast:

GBP / EUR	1.2100
GBP / USD	1.6650
EUR / USD	1.3750
GBP / AUD	1.7750

Nicholas Ebisch

Corporate Account Manager

Caxton FX

EUR, GBP, JPY benefit from dollar weakness

The dollar index has fallen significantly over the course of the week. This bearish attitude toward the Dollar throughout the week was a result of the Wednesday FOMC meeting in which the members of the Federal Reserve board expressed concern about low levels of inflation. This led to speculation that interest rates will remain low for longer. The Pound, Euro and Yen stood to benefit near the end of this week, as alternative safe-haven currencies, and have increased in value in the last 24-hours as investors have shied away from buying the dollar.

The Euro has improved against its major counterparts as a positive ECB monthly bulletin combined with Greece selling over $4 billion worth of bonds to eager investors on Thursday. The high-demand for Greek bonds on Thursday drew attention to how much those markets have recovered since the days of the Eurozone crisis. With these facts fresh in the minds of investors, the Euro has received a recent bump higher, but these gains may be limited as we currently forecast Dollar and Sterling strength in 2014.

Nicholas Ebisch

Corporate Account Manager

Caxton FX

UK Manufacturing Figures come in very strongly, IMF delivers positive news

This morning’s 9:30AM release of UK Manufacturing Production m/m (1.0%) was the highest increase in manufacturing output since November 2013 (1.2%). This shows that the UK economy is churning back to life in the New Year after the winter months and a revival natural-gas production in February has reportedly helped that along. GBP/EUR is up 0.45% on the day, GBP/USD is up 0.84% on the day, and Sterling has rallied against other currencies across the board for a sustained rate rise throughout the day after the figures this morning. This has increased optimism that the UK is poised for a strong GDP figure for the first quarter of the year and brightened the economic outlook.

Also, the IMF predicted today that the UK will have the fastest growth (2.9% y/y) of the leading G7 economies this year. The UK did not have a completely clean bill of health as the IMF accused the UK of an “unbalanced” recovery with greatly expanded mortgage lending and easier credit conditions. However, for the time being, the overall outlook of the UK is very positive, resulting in a strong pound.

Nicholas Ebisch

Corporate Account Manager

Caxton FX

Conventional and unconventional policies possible from the ECB

The ECB decided to keep interest rates unchanged at 0.25% as expected, but language from ECB President Draghi was dovish and suggested we may see the central bank take action in the next few months. Draghi highlighted the fact that prolonged low inflation itself is a risk, and said the governing council have had a detailed discussion about the possibility of negative position rates. Narrowing the rate corridor and quantitative easing were also measures that were mentioned, with the President claiming QE would need to be designed carefully in order to be effective. Some light was also shed on the strength of the single currency but it was emphasized that any action taken would not be targeted at the exchange rate. Draghi reinforce the fact that he does not see deflation risks in the eurozone, but with these options playing a greater role in ECB meetings, we feel the concern is becoming greater. 

The governing council felt more information was needed about the medium to long term inflation expectations before taking any action, but with different instruments tailored to address various issues it is unclear on what tool exactly the ECB is leaning towards. With the latest reading of 0.5%y/y surprising Draghi, the likelihood of invention in the next few months is increasing.

Sasha Nugent

Currency Analyst

Caxton FX 

April 2014 Currency Report: Will the ECB finally take action?

Market sentiment towards the pound has shifted over the month as investors begin to reassess the likelihood of tighter policy from the BoE. Considering the strength of the pound over the last few months, it is not surprising that we are beginning to see a correction in the GBP/USD rate. With sterling starting the month in a more vulnerable position, upcoming data needs to at least be in line with estimates in order to support the currency.

Demand for the euro resurfaced towards the end of last month. The latest flash inflation estimate has shown price pressures eased further to 0.5%y/y. For yet another month, the market remains firmly focussed on the ECB and whether the latest reading will have any impact on their stance. Considering their forecasts into 2016 suggest inflation will rise, we doubt the central bank will alter policy when they meet later this week.

In the first FOMC meeting since Janet Yellen became Fed chair, comments from the central banker suggested the Fed has more of a hawkish bias than previously thought. This has put the greenback in a better position to begin the month, and another strong payroll figure could encourage more significant dollar buying. Further comments from FOMC members will be watched closely in order to gauge whether Yellen’s comments regarding tightening were a slip of the tongue or other members also carry a more hawkish view.

The market pares back sterling holdings

The pound has advanced significantly over the past few months especially against the greenback and this has been fuelled by rate expectations in the first half of 2015. Over the past few weeks however, demand for the pound has eased and investors are reviewing their holdings of the currency. The market now feels the currency has advanced too quickly and some market participants are paring back their expectations of tighter policy.

The inflation rate has also fallen considerably and the latest reading showed price pressure continued to ease. As long as inflation remains below the 2% the BoE will be justified in its stance to keep interest rates at its current lows. Therefore we doubt there will be any shift in policy from the central bank this month. UK data will need to remain broadly positive in order to keep the currency competitive as the market looks to penalise the pound for any disappointing UK figures.

GBP/EUR

Deflation worries haven’t faded yet

Last month the single currency was supported by the preliminary reading which showed Eurozone inflation edged higher to 0.8% y/y. This reading was revised back to 0.7% y/y but with the latest figure showing inflation fell further to 0.5% y/y there is no evidence just yet that price pressures are building. We know from the central bank’s projections that the governing council still expect inflation to head towards their 2% target, with price pressures just below the benchmark by 2016. With this in mind, it is unlikely that the ECB ease policy further when they meet in the next few days. Downside risks have yet to materialise and medium to long term expectations remain firmly anchored reducing the likelihood of any change in stance from the central bank. Nevertheless, as long as inflation remains around 0.7% the question of whether further easing is necessary will remain.

Asian buyers continue to support the single currency and as long as Eurozone data comes in at least in line with estimates, we suspect the push for lower levels in GBP/EUR and higher in EUR/USD will continue. It will also be interesting to see whether the ECB take this opportunity to talk down the euro. The central bank has avoided verbally weakening the currency but at the last meeting, ECB President Draghi shed some light on the effect a stronger euro is having on inflation. Until the bank outright objects to the euro’s strength we doubt investors will hesitate to boost the currency further.

GBP/USD

Can the greenback keep momentum?

Last month we witnessed a shift in rhetoric from the Federal Reserve and this was enough to at least get the market to buy dollars. In the last Fed meeting, Chair Yellen suggested that we may see US interest rates rise within the first half of next year. The central bank have said interest rates will remain low for a considerable time but the market was under the impression a “considerable” would be longer than 6months after the end of QE. Speeches from Fed members throughout the month will carry more weight as investors attempt to get a handle on the Fed’s more hawkish stance. Yellen may not have meant to give the market a timeline to look towards, either way, much more dovish talk is needed to distract the market’s attention from spring 2015.

Though the dollar is now in a more favourable position, much more impressive data is needed to keep the momentum going. Non-farm payroll figures will be published on Friday and as usual the market will penalise the greenback for any figures below consensus. We believe at least a decent reading will spur greater demand for the greenback, especially if other economic figures ahead of the release also prove to be positive. Provided the employment report is encouraging, we could see the downward trend in EUR/USD and GBP/USD really begin to take hold this month.

GBP/EUR- 1.2160
GBP/USD- 1.6500
EUR/USD- 1.3700

Sasha Nugent
Currency Analyst
Caxton FX