The currency market has been stuck in limbo over the past few days, following the indecisive nature of the electoral result.
Trading has been extremely volatile, with investors reacting to the news as it breaks from Westminster. The political scene as it stands has come as a positive for both the UK gilt market and the currency, with a substantial part of uncertainty now removed.
Duncan Higgins, senior analyst at Caxton FX comments, “The market’s leading concern is Britain’s fiscal predicament and how the incoming government chooses to address it. From the market’s perspective, the Liberals concession on the timing of cutbacks has been particularly positive. The view now is that a coalition between the Conservatives and Lib Dems should still have the strength to enforce the necessary measures to bring Britain’s finances back under control.”
Sterling rallied across the board yesterday following the news and is continuing to edge higher this morning. However, just as one period of uncertainty comes to a close, speculation builds on just how the coalition will work in practice.
“In theory, Cameron’s entrance into Number 10 will have calmed markets for the moment. However, building a stable coalition is going to be a tall task and there is already severe dissent being voiced on both sides about the concessions being made to accommodate the other. The situation remains on a knife edge, and sterling is certainly still liable to pull back should problems arise,” continues Higgins.
The other major factor buoying sterling is the fragility of the situation in the eurozone. The recent bailout failed to allay fears, and the euro’s status as a reserve currency is coming increasingly under threat. At present sterling is holding around the 1.18 level.
Duncan Higgins adds, “Providing there are no nasty surprises from Westminster in the coming weeks, we could see sterling back above €1.20 by June."
Wednesday, 12 May 2010
Monday, 10 May 2010
Friday, 7 May 2010
Hung parliament sends sterling to gallows
After months of speculation, it appears that the pollsters have called it and the UK looks set for a hung parliament.
As the results have trickled in the Conservatives, as was expected, have got the majority vote and leading number of seats. However, they are certainly going to fall short of the 326 needed to form a majority and the markets have reacted accordingly. Sterling has slipped sharply across the board this morning, down over a percent against nearly all the majors.
Duncan Higgins, senior analyst at Caxton FX comments, “The political wrangling will begin in earnest next week, and credible signs of a working government could still be days, or even weeks away. In that time it is unlikely that we will see much reprieve for sterling. The fact that the markets have been pricing in a hung parliament scenario for some time now has almost certainly prevented the pound from sliding further against the euro.”
“The uncertainty surrounding the next government has simply compounded pressure on sterling, and against the dollar it is continuing to drop. With the ongoing crisis in the eurozone and its longer-term ramifications also in focus, we are not too optimistic about sterling’s short term prospects,” continues Higgins.
Sterling is currently trading just above 1.15 against the euro and it could begin to bounce back in the latter parts of next week should the coalition talks prove fruitful. Against the US currency, the pound is now nearing $1.46 and there could be further mileage in this drop should the US release positive job numbers today.
As the results have trickled in the Conservatives, as was expected, have got the majority vote and leading number of seats. However, they are certainly going to fall short of the 326 needed to form a majority and the markets have reacted accordingly. Sterling has slipped sharply across the board this morning, down over a percent against nearly all the majors.
Duncan Higgins, senior analyst at Caxton FX comments, “The political wrangling will begin in earnest next week, and credible signs of a working government could still be days, or even weeks away. In that time it is unlikely that we will see much reprieve for sterling. The fact that the markets have been pricing in a hung parliament scenario for some time now has almost certainly prevented the pound from sliding further against the euro.”
“The uncertainty surrounding the next government has simply compounded pressure on sterling, and against the dollar it is continuing to drop. With the ongoing crisis in the eurozone and its longer-term ramifications also in focus, we are not too optimistic about sterling’s short term prospects,” continues Higgins.
Sterling is currently trading just above 1.15 against the euro and it could begin to bounce back in the latter parts of next week should the coalition talks prove fruitful. Against the US currency, the pound is now nearing $1.46 and there could be further mileage in this drop should the US release positive job numbers today.
Wednesday, 28 April 2010
Greek ruins: bonds at junk status
In a move that came as no surprise to the markets, Standard & Poor’s have cut the credit rating of both Greece and Portugal.
With the yield charged by investors to hold Greek bonds still rising and default fears failing to ebb, S&P reduced Greek debt to “junk” status. Portugal also suffered a downgrade, with S&P maintaining a negative outlook, as the troubles in Greece show signs of spreading.
Investors are fearful that the problems in Greece are spreading to other peripheral nations; Portugal is looking set as the next target. Bond yields swiftly rose following the country’s credit downgrade and are continuing to do so.
Duncan Higgins, senior analyst at Caxton FX comments, “Clearly the danger for European officials is that the fiscal turmoil in the eurozone will spin out of their control. It now appears that Portugal is treading a precariously similar line to Greece.”
A report today suggests that the IMF may increase its share of financial aid to Greece by €10 billion euros from the current €15 billion euros already agreed. This does seem to have helped calm the markets momentarily and stemmed the euros losses. Focus heavily remains on the sustainability of the bailout programme. After two months of negotiations, investors want clarification that the conditions agreed will be sufficient to cover Greece’s debt obligations.
Greece has immediate debt obligations of €8.5 billion due May 19th, and the market is extremely wary that it may not meet these in time. Conditions of the bailout are still to be finalised and Germany, the main EU contributor, is acutely aware of the growing opposition to putting taxpayer’s money on the line in Greece.
“There is a risk that the market may start to bet against all heavily indebted eurozone nations, which could lead to a real crisis for the single currency. There is a lot resistance supporting the euro from sliding further against the dollar, with the price already at a one-year low. With EU talks as yet failing to show any positive results and fears quickly spreading, we anticipate a move to $1.25 in the next month,” continues Higgins.
The weakness in the euro is also spilling over to the sterling / US dollar rate. With investors buying back the safer currency, the greenback is gaining across the board. The pound is currently trading at a three-week low against the greenback. With a positive statement expected from the Fed this evening, we now expect to see sterling below $1.51 in the near term.
With the yield charged by investors to hold Greek bonds still rising and default fears failing to ebb, S&P reduced Greek debt to “junk” status. Portugal also suffered a downgrade, with S&P maintaining a negative outlook, as the troubles in Greece show signs of spreading.
Investors are fearful that the problems in Greece are spreading to other peripheral nations; Portugal is looking set as the next target. Bond yields swiftly rose following the country’s credit downgrade and are continuing to do so.
Duncan Higgins, senior analyst at Caxton FX comments, “Clearly the danger for European officials is that the fiscal turmoil in the eurozone will spin out of their control. It now appears that Portugal is treading a precariously similar line to Greece.”
A report today suggests that the IMF may increase its share of financial aid to Greece by €10 billion euros from the current €15 billion euros already agreed. This does seem to have helped calm the markets momentarily and stemmed the euros losses. Focus heavily remains on the sustainability of the bailout programme. After two months of negotiations, investors want clarification that the conditions agreed will be sufficient to cover Greece’s debt obligations.
Greece has immediate debt obligations of €8.5 billion due May 19th, and the market is extremely wary that it may not meet these in time. Conditions of the bailout are still to be finalised and Germany, the main EU contributor, is acutely aware of the growing opposition to putting taxpayer’s money on the line in Greece.
“There is a risk that the market may start to bet against all heavily indebted eurozone nations, which could lead to a real crisis for the single currency. There is a lot resistance supporting the euro from sliding further against the dollar, with the price already at a one-year low. With EU talks as yet failing to show any positive results and fears quickly spreading, we anticipate a move to $1.25 in the next month,” continues Higgins.
The weakness in the euro is also spilling over to the sterling / US dollar rate. With investors buying back the safer currency, the greenback is gaining across the board. The pound is currently trading at a three-week low against the greenback. With a positive statement expected from the Fed this evening, we now expect to see sterling below $1.51 in the near term.
Friday, 23 April 2010
Weak GDP figures halt sterling’s rally
This morning’s long awaited GDP figure has revealed that the UK economy only grew by 0.2% in the first three months of 2010.
Even though the percentage shows a continued move away from recession, market consensus was that GDP would be 0.4%. The pound slipped back half a cent against the euro in the immediate aftermath, falling from this morning’s high above 1.16.
Duncan Higgins, senior analyst at Caxton FX commented, “Market data this week has been encouraging for the UK and so this figure will certainly come as a disappointment. It also reveals that the economic recovery has slowed since the last quarter of 2009 when the economy grew by 0.4%. There may be revisions, but it is clear that Britain’s recovery is still set to be protracted, significantly lagging other G7 economies. ”
The data could also have a notable impact on the upcoming election, with each party looking to benefit.
“It works in favour of the Conservatives who can highlight the continued weakness of the recovery under a Labour government. However, Brown may try and work it to his advantage, emphasising the danger of implementing spending cuts before the recovery is fully cemented,” explains Higgins.
The market has understandably taken sterling lower in the wake of the release. However, movement has not been significant since the market may be anticipating an upward revision. The estimate of economic growth in the fourth quarter of 2009 was revised up from 0.1% to 0.4%.
Duncan Higgins adds, “Given the run against the euro this week, there was always a risk that a weak GDP would trigger profit taking. However, with the situation in Greece growing ever more precarious, the pound is unlikely to slip sharply in the near term.”
The pound is currently holding above €1.15 against the euro. Latest reports suggest that Greece will request activation of the EU/IMF package later today, which may offer slender support. Against the US dollar, the pound is not dropping sharply, with the price holding in the mid 1.53s.
Even though the percentage shows a continued move away from recession, market consensus was that GDP would be 0.4%. The pound slipped back half a cent against the euro in the immediate aftermath, falling from this morning’s high above 1.16.
Duncan Higgins, senior analyst at Caxton FX commented, “Market data this week has been encouraging for the UK and so this figure will certainly come as a disappointment. It also reveals that the economic recovery has slowed since the last quarter of 2009 when the economy grew by 0.4%. There may be revisions, but it is clear that Britain’s recovery is still set to be protracted, significantly lagging other G7 economies. ”
The data could also have a notable impact on the upcoming election, with each party looking to benefit.
“It works in favour of the Conservatives who can highlight the continued weakness of the recovery under a Labour government. However, Brown may try and work it to his advantage, emphasising the danger of implementing spending cuts before the recovery is fully cemented,” explains Higgins.
The market has understandably taken sterling lower in the wake of the release. However, movement has not been significant since the market may be anticipating an upward revision. The estimate of economic growth in the fourth quarter of 2009 was revised up from 0.1% to 0.4%.
Duncan Higgins adds, “Given the run against the euro this week, there was always a risk that a weak GDP would trigger profit taking. However, with the situation in Greece growing ever more precarious, the pound is unlikely to slip sharply in the near term.”
The pound is currently holding above €1.15 against the euro. Latest reports suggest that Greece will request activation of the EU/IMF package later today, which may offer slender support. Against the US dollar, the pound is not dropping sharply, with the price holding in the mid 1.53s.
Thursday, 22 April 2010
Sterling gains after public borrowing figures exceed forecasts
Although official figures confirmed the 2009/10 fiscal year as the worst since records began, sterling has held onto this morning’s gains.
Data released earlier, revealed that the government borrowed a further £23.5 billion in March, beating market forecasts of £24.1 billion. This translates to government net borrowing for the year at a record high of £163.4 billion. However, this falls below the amount that Alistair Darling predicted in his pre Budget report, giving Labour a lift after yesterday showed a rise in unemployment.
UK retail sales were also released this morning, posting an increase of 0.4% in March, below market consensus, which called for a rise of 0.7% on the month. Although this was disappointing, February’s figure was revised up by 0.4%, offsetting the negative sentiment.
Duncan Higgins, senior analyst at Caxton FX says, “The pound has managed to hold its ground this morning despite the weak borrowing figures. The market has taken the broader view that the government’s book is not in as quite a dire state as the pre Budget Report had us believe.”
The reaction to the poor retails sales has been relatively muted with the market focused on the UK’s first quarter economic growth due tomorrow morning.
“The data is expected to show that the economy grew by 0.4% in the three months through March. The risks look to be on the upside, with a string of strong figures from the UK buoying expectations. At present the market appears to have sidelined election worries, and should GDP fall in line with forecasts we could see sterling reach higher,” continues Higgins.
Currently the pound is consolidating above 1.15 against the euro and 1.54 against the dollar, though its upward climb has slowed.
Data released earlier, revealed that the government borrowed a further £23.5 billion in March, beating market forecasts of £24.1 billion. This translates to government net borrowing for the year at a record high of £163.4 billion. However, this falls below the amount that Alistair Darling predicted in his pre Budget report, giving Labour a lift after yesterday showed a rise in unemployment.
UK retail sales were also released this morning, posting an increase of 0.4% in March, below market consensus, which called for a rise of 0.7% on the month. Although this was disappointing, February’s figure was revised up by 0.4%, offsetting the negative sentiment.
Duncan Higgins, senior analyst at Caxton FX says, “The pound has managed to hold its ground this morning despite the weak borrowing figures. The market has taken the broader view that the government’s book is not in as quite a dire state as the pre Budget Report had us believe.”
The reaction to the poor retails sales has been relatively muted with the market focused on the UK’s first quarter economic growth due tomorrow morning.
“The data is expected to show that the economy grew by 0.4% in the three months through March. The risks look to be on the upside, with a string of strong figures from the UK buoying expectations. At present the market appears to have sidelined election worries, and should GDP fall in line with forecasts we could see sterling reach higher,” continues Higgins.
Currently the pound is consolidating above 1.15 against the euro and 1.54 against the dollar, though its upward climb has slowed.
Wednesday, 21 April 2010
Positive UK jobless figures buoys sterling’s recent rally
There has been more positive data from the UK this morning with the UK claimant count falling by 32,900 in March.
The forecast amongst experts was for a drop of just 7,500. The claimant count measure of unemployment for February was also revised. This showed 40,100 fewer people claiming, against an original reading of 32,500. Putting a slight dent on the figures, the overall rate of unemployment actually rose back to 8.0%, having held at 7.8% for the past three months.
The data has given sterling another boost this morning and it is currently trading around half cent up on the day against both the euro and the US dollar.
Duncan Higgins, senior analyst at Caxton FX comments, “Sterling is currently enjoying a positive run and the surprisingly steep fall in the number of Britons claiming benefit has further improved sentiment. Importantly, the figures raise expectations for a strong reading of economic growth in the first quarter, with all eyes on this data due Friday.”
“The employment data is important not only for the economy but also for its political ramifications. Recent polls have showed the Conservatives edging ahead once again, though this run of positive numbers from the UK could play into Labour’s hands,” continues Higgins
Duncan Higgins adds, “Should the data this week continue to point to an improving rate of recovery in the UK, we could see sterling near €1.16 and $1.55 by the week end.”
The minutes from the Bank of England latest policy meeting were also released this morning. As expected they revealed a unanimous decision among the members to keep policy unchanged. All members agreed that the events of the past month had not been sufficient enough to substantially alter their views of the medium-term outlook for inflation and activity.
The forecast amongst experts was for a drop of just 7,500. The claimant count measure of unemployment for February was also revised. This showed 40,100 fewer people claiming, against an original reading of 32,500. Putting a slight dent on the figures, the overall rate of unemployment actually rose back to 8.0%, having held at 7.8% for the past three months.
The data has given sterling another boost this morning and it is currently trading around half cent up on the day against both the euro and the US dollar.
Duncan Higgins, senior analyst at Caxton FX comments, “Sterling is currently enjoying a positive run and the surprisingly steep fall in the number of Britons claiming benefit has further improved sentiment. Importantly, the figures raise expectations for a strong reading of economic growth in the first quarter, with all eyes on this data due Friday.”
“The employment data is important not only for the economy but also for its political ramifications. Recent polls have showed the Conservatives edging ahead once again, though this run of positive numbers from the UK could play into Labour’s hands,” continues Higgins
Duncan Higgins adds, “Should the data this week continue to point to an improving rate of recovery in the UK, we could see sterling near €1.16 and $1.55 by the week end.”
The minutes from the Bank of England latest policy meeting were also released this morning. As expected they revealed a unanimous decision among the members to keep policy unchanged. All members agreed that the events of the past month had not been sufficient enough to substantially alter their views of the medium-term outlook for inflation and activity.
Tuesday, 20 April 2010
Higher import costs see rate of inflation move higher
Data this morning has revealed a rise in consumer prices, with the UK rate of inflation moving to 3.4% in March.
Market forecasts had expected a more modest rise of just 3.2%. Higher import prices, and the rising price of energy have kept upward pressure on inflation. The figure remains some way above the Bank of England’s 2.0% target, and Governor Mervyn King will again have to write a letter to Chancellor Alistair Darling explaining the rise. The Bank has forecast that the rate will fall back over the medium term. The bigger picture is that the high degree of spare capacity in the economy will drag on overall price pressures.
Duncan Higgins, senior analyst at Caxton FX comments, “The comparative weakness of the pound is continuing to push up the cost of imports, adding to inflationary pressures. The market is expecting the rate to fall as the year wears on, though the argument for raising interest rates will soon begin to build should inflation fail to slow.”
The pound briefly bounced in the wake of the news, but slipped back to pre-data trading levels as rumours beforehand had anticipated a higher figure. Currently sterling is holding just below €1.14 against the euro and is up around half a cent against the dollar, with the price hovering near $1.54.
“Any true upward momentum for the pound will be tough to come by with a range of figures this week still to be released, including first quarter economic growth. Market focus is also turned to the next leaders debate. Following the reaction seen in the polls previously, investors will be cautious of taking sterling too high ahead of Thursday evening,” continues Higgins.
Market forecasts had expected a more modest rise of just 3.2%. Higher import prices, and the rising price of energy have kept upward pressure on inflation. The figure remains some way above the Bank of England’s 2.0% target, and Governor Mervyn King will again have to write a letter to Chancellor Alistair Darling explaining the rise. The Bank has forecast that the rate will fall back over the medium term. The bigger picture is that the high degree of spare capacity in the economy will drag on overall price pressures.
Duncan Higgins, senior analyst at Caxton FX comments, “The comparative weakness of the pound is continuing to push up the cost of imports, adding to inflationary pressures. The market is expecting the rate to fall as the year wears on, though the argument for raising interest rates will soon begin to build should inflation fail to slow.”
The pound briefly bounced in the wake of the news, but slipped back to pre-data trading levels as rumours beforehand had anticipated a higher figure. Currently sterling is holding just below €1.14 against the euro and is up around half a cent against the dollar, with the price hovering near $1.54.
“Any true upward momentum for the pound will be tough to come by with a range of figures this week still to be released, including first quarter economic growth. Market focus is also turned to the next leaders debate. Following the reaction seen in the polls previously, investors will be cautious of taking sterling too high ahead of Thursday evening,” continues Higgins.
Wednesday, 14 April 2010
UK trade deficit beats expectations, pushing sterling up
Data this morning has shown that the UK trade deficit narrowed substantially in February following the disappointment of January’s figure.
A deficit of £6.2 billion was recorded for the month, some way from the median forecasts, which had called for a more moderate narrowing of the deficit to £7.3 billion. The last time the monthly deficit was at this level was in August 2009.The data should raise expectations that the UK can bring its debts under control. It also reveals the positive impact that the weak UK currency has had in lifting demand for British exports.
Duncan Higgins, senior analyst at Caxton FX says, “Sterling’s lowly rate is finally beginning to pay dividends. Its broad undervaluation in recent months has increased the competitiveness of UK exports, supporting a slight rebalancing of the deficit.”
“Certainly the data is supportive, and marks a positive step in reducing overall debt, but the road ahead will remain uneven. The incoming government, be it a single party or a coalition, needs to detail a precise strategy for financing the huge debt burden that lies on the UK economy. A steady appreciation of the pound will have to wait until the market is satisfied that such a plan has been clearly outlined,” continued Higgins.
Improved sentiment in the wake of the figures has given sterling a slight boost, bringing it off this morning’s lows. The pound is now trading comfortably back above €1.13, though remains some way from its seven-week high hit at the end of last week. It is also approaching 1.54 against the dollar, up fractionally on the day.
A deficit of £6.2 billion was recorded for the month, some way from the median forecasts, which had called for a more moderate narrowing of the deficit to £7.3 billion. The last time the monthly deficit was at this level was in August 2009.The data should raise expectations that the UK can bring its debts under control. It also reveals the positive impact that the weak UK currency has had in lifting demand for British exports.
Duncan Higgins, senior analyst at Caxton FX says, “Sterling’s lowly rate is finally beginning to pay dividends. Its broad undervaluation in recent months has increased the competitiveness of UK exports, supporting a slight rebalancing of the deficit.”
“Certainly the data is supportive, and marks a positive step in reducing overall debt, but the road ahead will remain uneven. The incoming government, be it a single party or a coalition, needs to detail a precise strategy for financing the huge debt burden that lies on the UK economy. A steady appreciation of the pound will have to wait until the market is satisfied that such a plan has been clearly outlined,” continued Higgins.
Improved sentiment in the wake of the figures has given sterling a slight boost, bringing it off this morning’s lows. The pound is now trading comfortably back above €1.13, though remains some way from its seven-week high hit at the end of last week. It is also approaching 1.54 against the dollar, up fractionally on the day.
Thursday, 8 April 2010
BoE keeps rates at 0.50%
In a scheduled announcement, the Bank of England has again kept its interest rate at 0.50%.
Even the most optimistic of forecasters do not see an increase in UK rates until the final quarter of this year. The Bank also kept their quantitative easing programme on hold, leaving the budget at £200 billion. In light of the latest figures, most recently better-than-expected manufacturing data released this morning, the question of a further extension to the budget seems to be fading. Following the upward revision to the UK's fourth quarter GDP figure and positive prospects for growth in this quarter, fear of the double-dip recession is receding. The Bank is still aware of the headwinds though, and is unlikely to dismiss the possibility of further monetary easing until conditions are more stable. Shortly, BoE Governor Mervyn King will give a statement on the progress of their monetary policies.
The pound is continuing to trade up this morning following the announcement, with direction in the short-term likely to come from developments on the campaign trail. Growing dissent in the business community over Labour's proposed National Insurance rise has solidified the Tories lead in the latest polls, with many leaders taking exception to Prime Minister Gordon Brown's assertion that they were being "deceived" by the Conservatives. However, the pound is unlikely to push too much higher despite continuing concern surrounding Greece's fiscal situation. Rhetoric from the Bank is still of a weak, protracted recovery and the growing possibility of a hung parliament will keep sterling on the back foot. The outlook for sterling against the US dollar remains on the downside and we are expecting further falls in the near term.
Even the most optimistic of forecasters do not see an increase in UK rates until the final quarter of this year. The Bank also kept their quantitative easing programme on hold, leaving the budget at £200 billion. In light of the latest figures, most recently better-than-expected manufacturing data released this morning, the question of a further extension to the budget seems to be fading. Following the upward revision to the UK's fourth quarter GDP figure and positive prospects for growth in this quarter, fear of the double-dip recession is receding. The Bank is still aware of the headwinds though, and is unlikely to dismiss the possibility of further monetary easing until conditions are more stable. Shortly, BoE Governor Mervyn King will give a statement on the progress of their monetary policies.
The pound is continuing to trade up this morning following the announcement, with direction in the short-term likely to come from developments on the campaign trail. Growing dissent in the business community over Labour's proposed National Insurance rise has solidified the Tories lead in the latest polls, with many leaders taking exception to Prime Minister Gordon Brown's assertion that they were being "deceived" by the Conservatives. However, the pound is unlikely to push too much higher despite continuing concern surrounding Greece's fiscal situation. Rhetoric from the Bank is still of a weak, protracted recovery and the growing possibility of a hung parliament will keep sterling on the back foot. The outlook for sterling against the US dollar remains on the downside and we are expecting further falls in the near term.
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