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 

A confidence booster for the BoE

After the last flagship forward guidance from the BoE undermined the credibility of forecasts and expectations, things seem to be getting off to a better start for the central bank. For the first time since November 2009, inflation has dropped marginally below the inflation target to 1.9%, further justifying the need to keep interest rate at current levels.

In the quarterly Inflation Report released last week, the bank predicted inflation would fall below the 2% target and expect lower levels to remain for a while to come. A combination of lower inflation and a decent recovery creates an environment which will allow the BoE to continue to maintain their accommodative stance, and further support the recovery.

There is also a hope that as the recovery gathers momentum, lower price pressures will reflect into rising real wages as pay increases outpace inflation, therefore restoring purchasing power. The next key release will be tomorrow’s unemployment figures and although a drop in unemployment would be positive, the focus will be on wage growth.

For now BoE forward guidance remains credible, however with the market still set on a rate increase in 2015, investors may need a little more convincing that interest rates will remain low for a while yet.

Sasha Nugent

Currency Analyst

Caxton FX

Caxton FX Weekly Report: Sterling keeps the pressure on

Sterling soars
It seems that nothing can stop demand for sterling now. The BoE’s adjustment to forward guidance went down well with the market and fuelled significant strengthening of the pound. Although the central bank ruled out any immediate tightening, confidence about the UK outlook and the prospect for a policy tightening in the first half on 2015 is strong. This week there is an opportunity for the pound to advance further as unemployment data could help the pound rebound after inflation came in below estimates. Some more encouraging numbers here will most likely keep the dollar and the euro on the back foot for yet another week.

The latest MPC minutes will be published, and it is unlikely that this will encourage any significant sterling buying. In the last monetary policy meeting the committee opted to maintain the current level of asset purchases and hold the bank rate at 0.50%. Considering the Inflation Report was released just last week, we doubt rhetoric in the minutes will differ much and therefore expect minimal movement on the back of that release.

PMI attempts to rescue the euro 

Despite some solid GDP figures last week, the euro is still struggling against sterling, and has failed to really push the EUR/USD rate further through 1.37. Growth across the region has boosted hopes that the worst of the regions crisis is behind it and this has made the outlook for the eurozone a little brighter. This week Eurozone PMI data will be key and some impressive results should contribute to more a positive view, and therefore be reflected into euro strength.

Last week talks of negative deposit rates in the Eurozone resurfaced as ECB member Coeure implied the ECB had seriously been discussing this option. Although the effect on the euro was temporary the market is still unsure about what is to come from the ECB, which could keep the euro vulnerable.

An important week ahead for the dollar

The greenback has taken a huge hit, especially against the pound as US data continues to disappoint giving investors more excuses to favour sterling. Comments from Fed chair Yellen were regarded as dovish and this has also weighed on the dollar’s performance. A buoyant pound has pushed cable towards three year highs and with sterling buyers waiting in the wings, US figures this week will need to impress to ease pressure off the dollar.

The Federal Open Market Committee (FOMC) will release the minutes from their last monetary policy meeting. Considering remarks made by Fed Chair Yellen, the market will be looking closely for any sign of a dovish bias from the central bank. Since their last decision to reduce asset purchases further by $10bn, yet another disappointing employment report has been released. Although this is unlikely to have a significant impact on their stance, it has provoked some concern about the labour market and an upbeat tone is needed in order to provide the greenback with some support. Pressure on the dollar has eased slightly, however with plenty of event risk ahead, it may not be long before the dollar is penalised for more disappointing figures.

End of week forecast

GBP / EUR	1.2150
GBP / USD	1.6675
EUR / USD	1.3675
GBP / AUD	1.8550

Sasha Nugent

Currency Analyst

Caxton FX

Dollar performance may be limited if UK growth continues to surpass expectations

It wasn’t so long ago when the Fed signalled a wind down in asset purchases was on the horizon, and the BoE could only hope to shift towards more normal monetary policy. How times have changed, and although the Fed has managed to begin tapering, the delay and minimal monthly reduction has resulted in a reduced effect on the GBPUSD rate.

The UK made a surprisingly strong recovery in the second half of last year, and in particular the improvement in the labour market has spurred speculation about when the BoE will bite the gun and raise interest rates. Both economies are on the right track, however the last two non-farm payrolls figures have been disappointing and raised questions about whether the Fed could continue to cut back purchases by $10bn every month.

In her first testimony to the House Financial Services Committee, Fed Chair Janet Yellen acknowledged the development being made in the US economy, but also highlighted that there was still more work to be done and it is important to consider more than just the unemployment rate when “evaluating the condition of the US labour market". In the latest BoE Inflation Report, Governor Carney expressed a similar viewpoint, and despite raising growth forecasts, emphasized that the amount of slack in the economy is a big issue and other broader indicators will be needed to evaluate the economy’s progress. Forward guidance from both the Fed and BoE has indicated that rates will be held constant even after the unemployment thresholds have been breached.

The key difference in policy which may alter the performance of cable (GBPUSD) over the coming year will be the Fed’s decision to taper and hold rates vs the BoE’s decision to raise rates before cutting back on asset purchases. Initially, tapering was expected to have a larger effect on the strength of the dollar as the market viewed it as a tightening of policy. Ever since the UK economy picked up, and forward guidance created a benchmark to gauge the likelihood of rate hikes, the interest rate hawks have been fuelling a stronger pound. The prospect of a rate increase may be far more tempting than continued tapering, especially at a pace of $10bn per month. Although both central banks are trying to convince the markets that policy will remain accommodative, the Fed seems to have succeeded, whilst BoE has failed so far. The fact that the BoE’s initial projections for unemployment were badly timed has had a large effect on the credibility of its forecasts. This has allowed the market to go with its own estimates and continue to price in a rate increase in Q2 2015.

As long as UK growth continues to outperform, the possibility of a rate hike will increase limiting the dollar's potential. Disappointing US data will hurt the greenback, and with the market regarding Yellen as a dove, we doubt investors will hesitate to weaken the dollar further.

Sasha Nugent

Currency Analyst

Caxton FX

No action from the ECB for now

The euro has been given a boost from less dovish remarks by ECB President Draghi, following the rate announcement which saw the central bank keep interest rates unchanged at 0.25%. The language was fairly unchanged considering what we have heard from the ECB in the last few months, however the unexpected dip in inflation had the market anticipating a more negative statement.

Draghi continued to emphasize the central banks focus on its medium to long term inflation expectations, claiming that more information is needed for the ECB to take action. The slip in inflation back to 0.7% y/y hardly affected the central bank’s stance and despite prolonged low inflation being a risk within itself, Mr Draghi said “We are alert to these risks and we stand ready and willing to act”.

There has been a grey area over what tools in particular the central bank stand ready to deploy. Some analysts thought the ECB could stop absorbing the euros created from its Securities Markets Programme. Although Mr Draghi claimed that this was one of the options being investigated, he also highlighted that there are other instruments being considered.

So where does the ECB stand now? In the same position it did before. The governing council require more information before deciding on whether to act, and “expect key interest rates to remain at present or lower levels for an extended period of time”. With Mr Draghi insisting the ECB does not see deflation in the eurozone, it is no surprise that the market took this as an opportunity to buy some more euros.

Sasha Nugent

Currency Analyst

Caxton FX

You can’t keep the pound that easily

In his first speech regarding Scottish independence, BoE Governor Carney outlined the potential issues that could arise if the Scottish kept the pound as part of a currency union. The Governor referred to the eurozone as an example of the significant steps that would need to be taken to support a monetary union. Carney said the Scottish government would have to give up some of its sovereignty over fiscal policy, and there would also need to be fiscal risk-sharing and solid banking arrangements.

The UK treasury has said it is highly unlikely that a currency union will be agreed and the Scottish government needs a plan B. The SNP have so far failed to come up with a “plan B” and despite this being a point of weakness, it is unlikely to hinder the campaign.

Sasha Nugent

Currency Analsyt

Caxton FX

What does the UK unemployment rate mean for monetary policy?

UK data delivered another surprise and according to the Office for National Statistics, the unemployment rate has dropped further to 7.1% from 7.4% bringing the 7% threshold given in forward guidance into question. With the unemployment rate now marginally above the benchmark, the need for the Bank of England to reassess the direction of interest rates is nearing.

Despite the labour market improving significantly faster than expected, the latest MPC meeting minutes suggest a rate increase is still unlikely to occur in the near future. The central bank sees no immediate need to raise interest rates, and with the inflation rate now on target there is even more room to maintain loose monetary policy. Of course the surprise drop in the unemployment will encourage the central bank to reconsider their view on the future for monetary policy, but the BoE will be cautious not raise rates prematurely.

This suggests that a re-evaluation of policy will rather result in an alteration in the central bank’s forward guidance, possibly a reduction in the unemployment benchmark to 6.5%, when the next quarterly Inflation Report is released on Feb 12. The market seems more excited about the fact that this unexpected result has brought the BoE closer to at least considering tightening policy, even if execution is not for a while yet. For now, this has been enough to keep demand for sterling rife.

Sasha Nugent

Currency Analyst

Caxton FX

Doomed if he does doomed if he doesn’t

What can I say, sterling is just leaving us with our mouths wide open. After last week’s disappointing production figures, it was easy to assume that today’s employment figures would just meet expectations. However, the light shone brightly on the UK this morning, and not only did claimant count smash expectations, but the unemployment rate dropped to 7.7%. All this does is boost market sentiment and confidence about the UK outlook. Now, as much as the UK has produced outstanding figures, one can only wonder about how this affects the BoE’s stance on interest rates and unemployment.

While it is unlikely that strong August figures will alter the central bank’s view on maintaining loose monetary policy, what should be noted is that the better the UK economy does, the more the market will question Governor Carney’s commitment to keep rates low at least until 2016. Today’s release of employment figures are even more crucial considering forward guidance outlined by the BoE.

Shouldn’t we really be thanking the central bank for its pledge to ensure low rates to promote growth, which considering recent figures seems to be doing the job? Yet you can’t help but ask: what about inflation? Currently inflation is above the central bank’s target at 2.8% and with growing domestic demand you must wonder how much further it can push. One thing we can be certain of is that if the recovery continues to be as robust as we have seen, the central bank may have to re-evaluate policy in order to ensure price stability. Not only will the market be listening attentively to the Inflation Report hearings tomorrow, but they will be also anticipating inflation figures released next week. When the going gets tough will Carney abandon his growth commitment and enforce price stability or vice versa? Either way, it looks like something will have to give.

Sasha Nugent
Currency Analyst
Caxton FX

Bank of Canada deals the loonie a blow

The Bank of Canada is ahead of almost every other developed nation central bank in terms of when it expects to normalise monetary policy (raise interest rates). The fact that it is even discussing it is your first clue, as conversations within central banks such as the Bank of England, Reserve Bank of Australia, the European Central Bank and the Riskbank are slanted towards rate cuts, not rate hikes. If it’s not rate cuts, then it’s more QE from the likes of the US Federal Reserve and the Bank of Japan, whose base rates are already at rock bottom levels.

Last year’s Bank of Canada rhetoric pointed towards a rate hike this year. However, the slowdown seen in the US at the end of 2012 has contributed to softer growth in its northern neighbour. Canadian growth has consistently surprised the BoC to the downside in the past year, particularly in the second half of 2012. Governor Carney (BoE-bound this summer) & Co yesterday indicated that the Canadian economy will not be up to full capacity until the second half of next year, which is a major delay compared to the previous ‘late 2013’ projection. Combined with subdued inflation and ongoing concerns over household imbalances, this has led the BoC to communicate that a rate hike is by no means imminent. It estimates a rate hike at the end of this year but our bet is that it will come a later than that.

The loonie has taken a hit as a result of the BoC’s change of position. GBP/CAD climbed by more than a cent and a half up to 1.5850, where it currently trades. Meanwhile CAD/USD dipped by a cent to a level just below parity, which represents a two-month low. This is a bit of a knock to the loonie but we do expect the currency to outperform GBP in the coming months, with another move down to 1.55 very much on the cards. 

Richard Driver

Currency Analyst

Caxton FX

Reserve Bank of Australia cuts growth prospects

The news as far as the aussie dollar has been concerned this week has been remarkably positive. We have to hold our hands up and say that we were expecting the RBA to cut its 3.25% interest rate again at its meeting this week, though we did warn that it was an incredibly close call. On top of this, data revealed that 10.7 thousand jobs were added to the Australian labour market, which was away ahead of expectation. The aussie unemployment rate also unexpectedly remained 5.4%.

What followed all this was last night’s RBA monetary policy statement. In it, the RBA warned that the aussie mining boom will peak earlier and at a lower level than has previously been thought. It was previously thought that the mining boom would peak at 9.0% of GDP, expectations are that it will now peak at 8.0%. The central bank also complained further about the strength of the Australian dollar (change the record!)and proceeded to downgrade aussie GDP projections for this year from around 3.00% to around 2.75%, though admittedly we might have expected this downgrade to be more drastic.

The RBA stated that the current interest rate is appropriate and that past rate cuts are still filtering through and benefiting the Australian economy. The statement also sounded confident that the Chinese economy has stabilised, anticipating a gradual recovery in growth from here.

We suspect that Governor Stevens may be getting ahead of himself with respect to Chinese growth and Australian growth. While this week’s strong aussie jobs data may see the RBA delay a rate cut in December, we’d be surprised if we had to wait past January for another cut. 

Richard Driver,

Currency Analyst

Caxton FX

Will the ECB cut interest rates next week?

Away from what’s going on in Spain and Greece, let’s take a look ahead at next week’s ECB meeting. This week’s key German business climate figure was awful and the significance of this will certainly not have been lost on the ECB. With economic contraction throughout the periphery weighing on growth in the eurozone’s powerhouse economy – will the ECB finally put its deeply engrained fear of high inflation to one side and give Germany and perhaps more importantly the rest of the eurozone a helping hand by lowering interest rates?

A German contraction in Q3 is not a certainty but it is now looking likely, particularly in light of the latest German confidence figure, which hit its lowest reading since March 2010. Spain’s central bank warned yesterday that its economy’s GDP continued falling at a “significant rate” in Q3, while S&P forecasted that Spanish GDP will contract by another 1.4% in 2013 and the eurozone economy a whole will achieve zero growth. With conditions so dire in Germany’s major eurozone trading partners, you don’t have to dig too deep to find motivation for a rate cut.

Domestic consumption, which accounts for around 60% of German GDP, is in good shape and consumer confidence remains stable. Admittedly, other domestic German indicators such as the ZEW and PMI surveys also suggested things are not so bad but we can probably put this down to temporary positivity triggered by the ECB’s bond-buying plan. The German business climate survey has built up a strong correlation with German GDP, which leads us to believe a Q3 contraction is on the way. Weak exports are likely to outweigh robust domestic demand.

Still, the ECB seems unlikely to cut interest rates next week. The ECB appears to have already factored in further weakness in eurozone growth; recently projecting a 2012 GDP contraction of between -0.6% and -0.2%. This latest poor figure from Germany probably does little to change the ECB’s approach. Indeed Draghi acknowledged a weaker business cycle in his September ECB Press Conference.

In addition, the ECB’s Nowotny has recently stated that he “sees no need to change interest rates in the eurozone currently.” ECB policymakers have also been lauding the positive response in the financial markets to the ECB’s bond-buying plan, suggesting they are satisfied with the 0.75% interest rate at present. Draghi will also be eager to keep the German ECB policymaker Weidmann on side by waiting until a rate cut is absolutely necessary, when German growth has completely ground to a halt and inflation has eased further. This is likely to happen later on in Q4, perhaps in December. The euro is certainly feeling the pressure at present but it will likely be spared the downside factor a rate cut for the time being.

Richard Driver

Currency Analyst

Caxton FX

Caxton FX July Currency Report: EUR, USD, GBP

Euro enjoys some respite but looks poised for another decline

It’s been a volatile few weeks with market sentiment chopping and changing, amid several important eurozone and US developments. Despite increasingly poor US growth data, the market was deprived the decision from the US Federal Reserve to introduce quantitative easing. Global economic growth in general is on a clear downtrend trend and investor confidence remains extremely fragile as a result.

From the eurozone though, we have at least seen some rare progress. The second attempt at the Greek general election produced the ‘least worst’ result and a coalition government has finally been formed. This development has eased short-term concerns of a messy default and a ‘Grexit’ but the real progress is yet to be made. Greece still needs to find a way of renegotiating the crippling terms of its bailout agreement, though Merkel’s tough stance provides plenty of scope for deadlock.

Euphoria relating to the avoidance of a Greek disaster (for now) was short-lived, with concerns towards Spain quickly taking hold. Spain’s bailout request for its troubled banks comes amid a host of downgrades to both the sovereign and its banks’ credit ratings, while soaring government bond yields threaten to force Spain itself into a bailout request.

Crucially, the results of the recent EU Summit exceeded expectations by some distance. Commitments were made on a more flexible use of the EU’s rescue funds in the sovereign bond markets (though details were conspicuous in their absence). Importantly, the EU rescue funds will be able to shore up Spain’s banks directly rather than being channeled via the government’s already debt –laden books. It was also confirmed that those loans would not have senior creditor status, easing concerns from private bondholders that they would be last in the queue for debt repayments.

June was an eventful month in terms of the UK economy as well, with speculation rife over Bank of England monetary policy. The Monetary Policy Committee made no changes in June, though the minutes from its meeting and subsequent comments were very revealing as to its next move. David Miles, the lone dove in favour of quantitative easing in May was joined by three other MPC members in June. We are expecting the pro-QE camp to secure a majority at its meeting this week, though the impact on sterling should be minimal.

GBP/EUR

Sterling poised for higher climbs against the euro

Sterling has edged higher against the single currency, which continues to suffer from the pressures of the debt crisis. Whilst EU leaders have made some steps in the right direction of late, we still see stalling eurozone progress pushing sterling higher against the single currency.

Sterling’s gains may be a little surprising given that news from the UK economy has been consistently negative; the UK manufacturing and construction sectors remain in the doldrums, while UK services sector continues to grow but is unable to pick up the slack. Data out of the labour market has been typically poor and the Q1 GDP contraction has been confirmed as -0.3%. Disappointingly, the Q4 GDP figure for 2011 was revised down from -0.3% to -0.4%, though such backward-looking data was not damaging to sterling.

There have been some small pockets of optimism, with UK retail sales bouncing back impressively from April’s collapse but as emphasised by Bank of England policymakers in recent weeks, the risks posed by the eurozone debt crisis are great and the UK’s prospects are highly uncertain. Overall, UK growth data over past three months (Q2) points is indicative of another contraction in UK GDP, so the double-dip recession rolls on.

Accordingly, we now fully expect the MPC to introduce another round of quantitative easing at its next meeting on July 5th. The UK inflation rate dropped from 3.0% to 2.8% in May, which along with ever-increasing concerns over UK growth as expressed in last month’s MPC minutes, seems almost certain to push the MPC into additional monetary stimulus this week. With regard to a cut to the BoE’s record-low interest rate of 0.50%, the issue has certainly been discussed by the MPC but QE is looking the preferred route to supporting the domestic economy at present.

EU leaders take some steps in the right direction

Unsurprisingly, conditions in the eurozone were extremely volatile in June and this will doubtless remain the case in July. While New Democracy may have secured a narrow victory in the re-run of the Greek general election and formed a coalition government, the renegotiation of Greece’s bailout agreement is bound to place Greece uncomfortably under the spotlight once again in the coming weeks. Greece’s negotiations with the Troika over its bailout terms are expected to take place on July 24th, so expect some major uncertainty around this date.

Importantly, the EU Summit has eased concerns surrounding Spain by producing an agreement to allow the EU’s rescue fund to directly recapitalise its banks, rather than adding to the sovereign’s debt to GDP ratio and driving up its borrowing costs. Market players were also extremely relieved to learn that bailout loans to Spanish banks will not be granted senior creditor status and that the eurozone rescue funds will be used more flexibly to allow peripheral bond-buying.

Nonetheless, the euro has been sold after its recent rally, which goes to show the scepticism and doubts that remain with regard to the future of the eurozone. Growth-wise in Q2, the euro-area could be looking at the worst quarterly growth figure in three years. There are also still huge implementation risks to the decisions that were made at the EU Summit, as shown by Finland and the Netherland’s recent pledge to block any bond-buying by the eurozone’s bailout funds.

The eurozone’s €500bn bailout resources are still inadequate and Merkel continues to stand firm against the introduction of Eurobonds. Progress was certainly made at the EU Summit but they were crisis management decisions, rather than decisions which can fundamentally change the direction of the debt crisis. No long-term solution is in sight and in addition, the ECB is set to reduce the euro’s yield differential this week by cutting its interest rate from 1.00% by at least 0.25%.

In short, we remain bearish on the euro and continue to favour the safety of sterling. There should be several opportunities to buy euros with the interbank above €1.25, while there is a significant chance of seeing this pair test its 3 ½ year highs of €1.2575.

GBP/USD

Sterling looking vulnerable against the greenback after strong run

The US dollar traded rather softly for much of June, which was not wholly surprising given the huge rally it enjoyed in May. The dollar has been held back by profit-taking in the wake of the USD’s May rally. It has also been hemmed in by fears (or hopes, depending on your exposure) that the US Federal Reserve will decide to usher in further quantitative easing (QE3). QE3, if it comes, will boost risk appetite away from the US dollar as investors target higher-yielding assets.

In its June 20th meeting and subsequent announcement, the Fed decided not to pull the trigger on QE3 and the dollar responded positively as you would expect. US data has without doubt increased the chances of QE3; figures from the retail and manufacturing sectors have been particularly disappointing, while consumer sentiment has also taken a turn for the worse. Most importantly as far as the Fed is concerned, key growth data from the US labour market weakened for the fifth consecutive month in June. Nonetheless for now, the Fed is keeping its powder dry with regard to QE3, holding it back to deal with a potentially even greater deterioration in US growth.

US dollar to bounce back

As shown by the knee-jerk response to the recent EU Summit, progress on the eurozone debt crisis can always lift market confidence to weaken the dollar. However, as shown by the market’s fading post-Summit enthusiasm, investors are proving increasingly hard to convince.

We think that the tough resistance that EUR/USD is meeting at levels above $1.27 will hold, which should usher in a move lower and possibly a retest of May’s lows below $1.24. GBP/USD is meeting resistance at $1.57 and we also think this resistance level will hold, making a move lower for this pair equally likely. We consider current levels to be a strong level (in the current circumstances) at which to buy dollars, with the rate heading back down to $1.55 in July.

Monthly Forecasts

GBP/EUR: €1.2550
GBP/USD: $1.55
EUR/USD: $1.24

Richard Driver
Analyst – Caxton FX
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Euro rebounds a little, but not for long

Sterling’s rally finally comes to a halt

Whilst sterling remains strong against the commodity currencies, it has suffered somewhat against the euro and the US dollar in recent sessions. The Bank of England’s Quarterly Inflation Report proved the catalyst for a significant bout of profit-taking on the pound’s rally. The Report saw the BoE downgrade its longer-term inflation and growth forecasts, sounding particularly dovish whilst doing so. Concerns over whether the BoE will introduce further quantitative easing have increased as a result, which has weighed on the pound significantly.

The week ahead brings with it plenty of risks for sterling. Wednesday’s minutes will once again bring BoE monetary policy back into focus – all eyes will be on how the MPC voted on QE in its May meeting. David Miles is likely to have stuck to his pro-QE stance and one or two others may well have been convinced by his arguments, which would be sterling-negative. Comments from the once reliably dovish Adam Posen have also added to QE bets. Posen publically questioned the wisdom of his decision not to vote for QE at the MPC’s May meeting, suggesting he can be counted on to do so again in coming months. Inflation data this morning has seen the headline rate come down pretty sharply from 3.5% to 3.0%, once again bolstering arguments in favour of monetary easing.

Also on Wednesday we have the release of April’s growth data from the UK’s retail sector. Having seen the wettest April since records began, the figure is expected to show a fairly sizeable contraction, particularly after the excellent growth seen in March. Thursday brings the revised UK GDP figure for the first quarter of this year. No amendment from the initial estimate of -0.2%, so the figure is unlikely to be a source of great support for the pound.

On the face of it then, it looks to be a tough week ahead for the pound. In addition to these domestic announcements, risk appetite away from safer currencies such as sterling looks to be staging a minor recovery. With the potentially disastrous effects of a Greek euro-exit now sunk in, if not fully priced in, we may well have seen the worst of investor panic. That is of course until the Greek elections come into view in the build up to the June 17th Greek elections. Sterling’s safe-haven demand looks set to come back to the fore ahead of this huge risk event.

G8 pledge support for Greece to remain within euro

The leaders of the world’s eight largest industrialised nations backed Greece to remain within the single currency over the weekend. With Germany sticking to its demands for austerity though (and who can really blame them?), it’s tough to see how the situation can lead to anything but a Greek default and euro-exit.

The profit-taking on sterling’s rally has taken the GBP/EUR rate down to its current level of €1.2350. It is difficult to see sterling losing too much more ground to the euro given the uncertainty that is lurking in June but with sterling facing several risky announcements this week, we may see today’s sideways trading theme dominate direction this week.

Against the dollar, sterling continues to feel the heat and is now trading down at $1.58. We expect to see the USD maintain its current demand, though its recent rate of appreciation is clearly unsustainable. EUR/USD has staged a minor recovery, having touched a 4-month low around $1.2650. We are going to need to see further climb from the current level of $1.2770 towards $1.30 if we are to revise calls for much lower levels in coming weeks.

End of week forecast
GBP / EUR 1.24
GBP / USD 1.57
EUR / USD 1.27
GBP / AUD 1.60

Richard Driver
Caxton FX

Caxton FX Weekly Round-up: MPC minutes and UK budget in focus

Dollar struggling to sustain the gains that data would indicate

The US dollar has recently posted ten and eighteen-day low against both the euro and the pound respectively. This belies the excellent growth data that has been surfacing from the US throughout March.

The highlights from last week included some strong US retail sales numbers, a positive US bank stress test result and some further impressive US manufacturing growth figures. The dollar sold-off on Friday however, largely a as a result of the softer-than-expected US inflation figure, which caused some players to revise their bets on the likelihood of ‘QE3’ from the US Federal Reserve.

Fed Chairman has indicated that QE3 is unlikely to be adopted and we maintain this view, which should aid the dollar this year. As the Fed’s Dudley reminded us yesterday, this is all contingent on the maintenance of the uptrend we are seeing in the US economy. Despite Friday’s poor US consumer confidence figure, there is little need to revise our bullish expectations for US GDP in 2012.

MPC minutes and UK annual budget comes into view

Bouncing back from last week’s poor UK unemployment figures and Fitch’s downgrade to the UK’s rating outlook, the pound has made an excellent start to the week. Taken against a basket of 13 major currencies, GBP is trading at its strongest level in over a year. However, the release of the minutes from the Monetary Policy Committee’s March meeting represents a risk event for the pound.

The impact of the minutes on the pound will be dictated by the tone struck with regard to the UK economy and the voting pattern with regard to increasing the Bank of England’s ongoing quantitative easing programme. Today’s UK inflation data revealed a further decline in price pressures to 3.4% (y/y), which highlights the scope for further QE should the MPC feel it necessary. King has indicated that enough QE has been done but the uncertain outlook for the UK economy will certainly keep UK data (such as Thursday’s UK retail sales figure) in focus in the coming months. Nonetheless, the slight uptrend in UK growth should improve the chances of a less dovish, sterling-positive MPC minutes release.

The UK Annual Budget announcement from Chancellor George Osborne will also be eyed closely on Wednesday lunchtime. In light of Fitch’s warning that the UK could lose its coveted AAA credit rating, Osborne is likely to ‘stick to his guns’ with regard to his austerity programme.

GBP may benefit from some support if Osborne can convince the markets that he can fuel UK growth amid ongoing belt-tightening. While significant domestically, there may well have to be some major headlines out of Osborne’s budget in order to cause much of a stir in the currency markets.

Sterling made another attempt at the $1.60 level on Monday but once again fell short, which could signal another move lower for GBP/USD, which currently trades just below $1.59. Against the euro, sterling is trading firmly around €1.20, though once again progress is stalling at these levels close to multi-month highs. With eurozone growth data likely to be weak on Thursday, we continue to look for stronger GBP/EUR levels and lower GBP/USD levels.

End of week forecast
GBP / EUR 1.2075

GBP / USD 1.5675
EUR / USD 1.31
GBP / AUD 1.5250

Richard Driver
Currency Analyst
Caxton FX