Stocks tumble but the major pairings remain in range
Attention last week was very much centred on activities in the stock market. The US debt downgrade, combined with ongoing concerns surrounding global growth and the absence of a long-term solution to the eurozone debt situation, triggered major declines in global equities. Market confidence was as low as we have seen it all year. Nonetheless, the US dollar failed to capitalise from heightened demand for safe-haven assets.
However, there have not been major moves amongst the major currency pairings; sterling remains fairly unchanged against both the euro and the dollar. The truth remains that the US, UK and eurozone economies have such serious economic problems that they cannot muster the support to sustain a rally.
The main event this week as far as the euro is concerned is tomorrow’s meeting between Merkel and Sarkozy. The two heavyweights will be looking at a long-term solution to the euro-regions debt situation which is now threatening major eurozone nations such as Spain, Italy and France.
The Fed promises record-low rates until mid-2013
Last week’s US Federal Reserve meeting was highly significant. Chairman Ben Bernanke announced that the US interest rate will remain at its current record-low level of <0.25% for the next two years, in a bid to nurture the US economy’s struggling recovery. The removal of any rate hike bets weakens the US dollar’s prospects in the long-term. However, prevailing concerns surrounding another global recession are likely to keep the greenback supported via its safe-haven demand.
In terms of the US economy, we had more mixed data last week. Monthly US retail sales figures showed an encouraging uptick, but some awful US consumer sentiment data suggests future figures could disappoint. This week’s data calendar is a quiet one from the US economy, we have had some awful manufacturing data out this afternoon which will only cement pessimistic bets for growth.
MPC minutes in focus
This week brings some important UK-related news. The UK consumer price index (headline inflation) is announced tomorrow. This is forecast to show an uptick but last week’s BoE quarterly inflation report was distinctly dovish on this issue. It suggested that inflation will still spike up to 5.0% in coming months, before falling fairly rapidly back down towards the official 2.0% target next year.
The MPC minutes are released on Wednesday and it will be very interesting to see whether quantitative easing gained further air-time, and whether one of the two remaining MPC hawks defected to the dovish camp. One thing can be safely assumed, there will be no UK interest rate hike for many months to come. Thursday sees the release of the monthly UK retail sales figure, which is expected to show some further modest growth.
End of week forecast
GBP / EUR 1.13
GBP / USD 1.6330
EUR / USD 1.4450
GBP / AUD 1.55
Richard Driver
Currency Analyst
Caxton FX
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Monday, 15 August 2011
Thursday, 11 August 2011
France could be the tipping point to euro collapse
The equity markets came under further downward pressure today. The fresh concerns that have arisen in the last couple of session have been directed at France.
There was speculation yesterday that France, the eurozone’s second largest economy, would lose its AAA credit rating (as the US had done in the past week). Three main rating agencies (Standard & Poor’s, Moody’s and Fitch’s) have all announced this week that France’s top credit rating is secure, and have confirmed the allocation of a ‘stable’ outlook.
As a result of these fresh eurozone concerns and ongoing fears of another global recession, European stocks opened poorly this morning. The share prices of major French banks such as BNP Paribas, Credit Agricole and Societe Generale fell by as much as 20% in a day. The FTSE 100 dipped below the key 5000 benchmark and the French index, the CAC 40 has made major losses as well, as you might expect. However, a strong start to the US session has boosted market confidence a little, suggesting equities had been oversold.
So what’s all the fuss about? Well, France has high debt, a huge deficit and major exposure to peripheral debt. The market is incredibly nervous at present and highly sensitive to rumours, and the French banks fell foul in a major way.
What would happen if France lost its AA credit rating? Well, this would almost certainly be a catastrophe. The absence of the top rating will discount France as a guarantor for loans to the periphery. This leaves Germany to bailout Spain and Italy (if...or as some are predicting, when this becomes necessary) pretty much on its own. Can Merkel really justify this to the German people, bankrolling the rest of the eurozone because they could not help but to irresponsibly accumulate totally unsustainable debt?
France’s credit rating then, could well be the tipping point to the Armageddon situation that so many commentators are forecasting- the end of the euro. This could well explain why the stock market hit French banks so hard this week.
Richard Driver
Senior Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
There was speculation yesterday that France, the eurozone’s second largest economy, would lose its AAA credit rating (as the US had done in the past week). Three main rating agencies (Standard & Poor’s, Moody’s and Fitch’s) have all announced this week that France’s top credit rating is secure, and have confirmed the allocation of a ‘stable’ outlook.
As a result of these fresh eurozone concerns and ongoing fears of another global recession, European stocks opened poorly this morning. The share prices of major French banks such as BNP Paribas, Credit Agricole and Societe Generale fell by as much as 20% in a day. The FTSE 100 dipped below the key 5000 benchmark and the French index, the CAC 40 has made major losses as well, as you might expect. However, a strong start to the US session has boosted market confidence a little, suggesting equities had been oversold.
So what’s all the fuss about? Well, France has high debt, a huge deficit and major exposure to peripheral debt. The market is incredibly nervous at present and highly sensitive to rumours, and the French banks fell foul in a major way.
What would happen if France lost its AA credit rating? Well, this would almost certainly be a catastrophe. The absence of the top rating will discount France as a guarantor for loans to the periphery. This leaves Germany to bailout Spain and Italy (if...or as some are predicting, when this becomes necessary) pretty much on its own. Can Merkel really justify this to the German people, bankrolling the rest of the eurozone because they could not help but to irresponsibly accumulate totally unsustainable debt?
France’s credit rating then, could well be the tipping point to the Armageddon situation that so many commentators are forecasting- the end of the euro. This could well explain why the stock market hit French banks so hard this week.
Richard Driver
Senior Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Wednesday, 10 August 2011
Bank of England downgrades UK growth prospects
The Bank of England’s quarterly inflation report has revealed downgraded growth forecasts for the UK economy and a calmer projection of UK inflation. Higher prices may not be positive for me and you as consumers, but investors love high inflation, because the best tool for controlling it is raising interest rates (and we all love higher interest rates...as long as we are not borrowing).
The market was prepared for a more pessimistic outlook for UK economy. Growth figures over the past quarter have taken a turn for the worse and expectations are not for a strong rebound, so the Bank of England’s forecasts stand to reason.
On the upside for sterling, Mervyn King gave us no reason to think they are moving any closer to introducing further quantitative easing. Nonetheless, the Bank of England will be satisfied to ride out the expected spike up to 5% in UK inflation in the short-term, before watching prices ease fairly rapidly next year. In the absence of high inflation in 2012 and with growth likely to be stodgy, a Bank of England rate hike looks unlikely to come at all next year at this stage. The Bank of England is mirroring the Fed’s monetary policy outlook to a certain extent; no QE yet and certainly no rate hike for a long time.
What we are seeing is uncertainty in the global economy filtering into central bank monetary policy. Near-term interest rate bets in Australia, New Zealand, Norway and the eurozone have all been scaled back as a result of the eurozone debt panic and fears of another US recession; people really don’t know what’s going to happen.
Sterling recovered from a knee-jerk sell-off against both the euro and the dollar; after all, there were no great surprises from the report or from King. This afternoon has seen equities suffer another sell-of, which has seen risk currencies, including the euro suffer some fairly sharp declines. The US Federal Reserve’s statement last night has clearly done little to ease market fears that the US economy is heading back into a recession, not to mention the unresolved debt crisis in the eurozone. Speculation is also surfacing that France (a core eurozone nation) may lose its AAA credit rating, just as the US has recently done at the hands of Standard and Poor’s.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
The market was prepared for a more pessimistic outlook for UK economy. Growth figures over the past quarter have taken a turn for the worse and expectations are not for a strong rebound, so the Bank of England’s forecasts stand to reason.
On the upside for sterling, Mervyn King gave us no reason to think they are moving any closer to introducing further quantitative easing. Nonetheless, the Bank of England will be satisfied to ride out the expected spike up to 5% in UK inflation in the short-term, before watching prices ease fairly rapidly next year. In the absence of high inflation in 2012 and with growth likely to be stodgy, a Bank of England rate hike looks unlikely to come at all next year at this stage. The Bank of England is mirroring the Fed’s monetary policy outlook to a certain extent; no QE yet and certainly no rate hike for a long time.
What we are seeing is uncertainty in the global economy filtering into central bank monetary policy. Near-term interest rate bets in Australia, New Zealand, Norway and the eurozone have all been scaled back as a result of the eurozone debt panic and fears of another US recession; people really don’t know what’s going to happen.
Sterling recovered from a knee-jerk sell-off against both the euro and the dollar; after all, there were no great surprises from the report or from King. This afternoon has seen equities suffer another sell-of, which has seen risk currencies, including the euro suffer some fairly sharp declines. The US Federal Reserve’s statement last night has clearly done little to ease market fears that the US economy is heading back into a recession, not to mention the unresolved debt crisis in the eurozone. Speculation is also surfacing that France (a core eurozone nation) may lose its AAA credit rating, just as the US has recently done at the hands of Standard and Poor’s.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Tuesday, 9 August 2011
Global stocks suffer as global recession fears mount
Away from the turmoil that we are seeing on the streets of the UK, matters in the financial markets are equally chaotic. The FTSE 100 dipped below the 5000 benchmark for the first time in over a year and indices across the world are showing similarly sharp declines.
What has caused it? Well, concerns over global growth have been growing over recent weeks and months. There has been a noticeable slowdown in growth data throughout the global economies. Most alarmingly though, the US economy has entered an alarming ‘soft patch.’
Eurozone debt issues have also built to a crescendo in recent weeks. Greece narrowly avoided a messy default (though it was clearly a selective default) and was dealt its second bailout in 18months and Portugal has had to be bailed out. Even more concerning is the fact that bond yields in Spain and Italy (two major eurozone economies) have hit record highs in the past week. Unless borrowing costs in these two nations calm down, the willingness of Germany to provide further funding will be stretched to breaking point. Surely Germany cannot be expected to bankroll the eurozone’s heavily indebted states indefinitely.
Arguably the straw that broke the camel’s back was rating agency Standard & Poor’s avoidance of the United States’ AAA credit rating. Their eleventh hour avoidance of a US default failed to prevent the move, and global markets have reacted by flooding out of risk assets and into safe-havens such as gold and the swiss franc.
The steep decline we have seen in recent sessions has stabilised today, perhaps indicative of a feeling that stocks have been oversold. However, with the US Federal Reserve meeting tonight and tomorrow’s UK quarterly inflation report likely to downgrade respective US and UK growth forecasts, the good news story to boost confidence looks unlikely to be forthcoming.
The safe-haven dollar is trading pretty strongly at present but long-term prospects look fairly grim from where we are sitting. Low growth, high unemployment, a debt downgrade, ultra-loose monetary policy and the possibility of a third programme of quantitative easing, low inflation; all these factors point to a weaker dollar. Yes the UK and the eurozone have their own problems, very serious problems, but the dollar looks particularly weak in the long-term.
Meanwhile, events in London may well be taking their toll on the sterling. Things are getting out of hand and it wouldn’t be surprising for the markets to finally take note.
Richard Driver
Senior Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
What has caused it? Well, concerns over global growth have been growing over recent weeks and months. There has been a noticeable slowdown in growth data throughout the global economies. Most alarmingly though, the US economy has entered an alarming ‘soft patch.’
Eurozone debt issues have also built to a crescendo in recent weeks. Greece narrowly avoided a messy default (though it was clearly a selective default) and was dealt its second bailout in 18months and Portugal has had to be bailed out. Even more concerning is the fact that bond yields in Spain and Italy (two major eurozone economies) have hit record highs in the past week. Unless borrowing costs in these two nations calm down, the willingness of Germany to provide further funding will be stretched to breaking point. Surely Germany cannot be expected to bankroll the eurozone’s heavily indebted states indefinitely.
Arguably the straw that broke the camel’s back was rating agency Standard & Poor’s avoidance of the United States’ AAA credit rating. Their eleventh hour avoidance of a US default failed to prevent the move, and global markets have reacted by flooding out of risk assets and into safe-havens such as gold and the swiss franc.
The steep decline we have seen in recent sessions has stabilised today, perhaps indicative of a feeling that stocks have been oversold. However, with the US Federal Reserve meeting tonight and tomorrow’s UK quarterly inflation report likely to downgrade respective US and UK growth forecasts, the good news story to boost confidence looks unlikely to be forthcoming.
The safe-haven dollar is trading pretty strongly at present but long-term prospects look fairly grim from where we are sitting. Low growth, high unemployment, a debt downgrade, ultra-loose monetary policy and the possibility of a third programme of quantitative easing, low inflation; all these factors point to a weaker dollar. Yes the UK and the eurozone have their own problems, very serious problems, but the dollar looks particularly weak in the long-term.
Meanwhile, events in London may well be taking their toll on the sterling. Things are getting out of hand and it wouldn’t be surprising for the markets to finally take note.
Richard Driver
Senior Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Monday, 11 July 2011
Delay is hurting the euro.
Shares in Italy’s biggest bank, Unicredit Spa, lost 7.9 percent on what the Italian media have dubbed “Black Friday,” a day which saw a large sell-off in Italian assets. Unicredit Spa, along with several other banks, witnessed a sharp drop in the stock market caused largely by worries about the results of stress tests of European banks, the results of which will be released on July 15th. Friday’s market sell-off has increased fears that Italy, the third largest economy in the euro zone, could be the next to suffer in the debt crisis. This brings major concern to the ECB as the euro zone’s current rescue mechanism, the EFSF, would have insufficient funds to help should Italian bond yields continue to rise and put heavy pressure on Italy’s finances.
A gathering of the European Union’s top finance officials in Brussels on Monday is being described as a “coordination, not a crisis meeting.” Despite Herman Van Rompuy’s (president of the European Council) spokesman claiming that Italy will not be on the agenda, it seems impossible that the situation in Italy will not be discussed in Van Rompuy’s meeting with ECB President Jean-Claude Trichet and Jean-Claude Juncker, chairman of the Eurogroup and a few more.
This small meeting of EU finance officials comes ahead of a larger meeting of the 17 euro zone ministers this afternoon which will focus mainly on discussion of the private sector’s involvement in a second bailout package for Greece. Germany, Austria, Finland and the Netherlands are the main advocates in pushing for banks, insurers and other private holders of Greek bonds to shoulder up to a quarter of the bailout package, but after two weeks of negotiations with bankers, very little progress has been made on a plan agreeable to all sides.
The latest proposal that seems to be gaining credence is a plan which would swap Greek bonds for longer-dated debt that would extend maturities by seven years. However, this would likely be seen as a default by ratings agencies while both ECB and German officials stick tight to their claims that they will not accept any plan that is regarded a default.
Another idea that has been floated around, but would essentially mean euro zone finance ministers’ accepting a Greek default, is a buy-back system in which the EFSF bailout fund would buy Greek bonds from the market and retire them. Another major problem with this idea is that it would require changes to the EFSF’s rules, so it would have to pass through national parliaments.
A key issue in all of this is time. Although Greece says it doesn’t need the bailout until early September, euro zone officials see it necessary to get a deal done within the next couple of weeks as any further delay could weigh heavily on investor confidence in the region. As for the euro, speed is definitely of the essence. It has declined by over two cents against the dollar, and by almost a cent against the pound.
Matt Abraham
Caxton FX
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A gathering of the European Union’s top finance officials in Brussels on Monday is being described as a “coordination, not a crisis meeting.” Despite Herman Van Rompuy’s (president of the European Council) spokesman claiming that Italy will not be on the agenda, it seems impossible that the situation in Italy will not be discussed in Van Rompuy’s meeting with ECB President Jean-Claude Trichet and Jean-Claude Juncker, chairman of the Eurogroup and a few more.
This small meeting of EU finance officials comes ahead of a larger meeting of the 17 euro zone ministers this afternoon which will focus mainly on discussion of the private sector’s involvement in a second bailout package for Greece. Germany, Austria, Finland and the Netherlands are the main advocates in pushing for banks, insurers and other private holders of Greek bonds to shoulder up to a quarter of the bailout package, but after two weeks of negotiations with bankers, very little progress has been made on a plan agreeable to all sides.
The latest proposal that seems to be gaining credence is a plan which would swap Greek bonds for longer-dated debt that would extend maturities by seven years. However, this would likely be seen as a default by ratings agencies while both ECB and German officials stick tight to their claims that they will not accept any plan that is regarded a default.
Another idea that has been floated around, but would essentially mean euro zone finance ministers’ accepting a Greek default, is a buy-back system in which the EFSF bailout fund would buy Greek bonds from the market and retire them. Another major problem with this idea is that it would require changes to the EFSF’s rules, so it would have to pass through national parliaments.
A key issue in all of this is time. Although Greece says it doesn’t need the bailout until early September, euro zone officials see it necessary to get a deal done within the next couple of weeks as any further delay could weigh heavily on investor confidence in the region. As for the euro, speed is definitely of the essence. It has declined by over two cents against the dollar, and by almost a cent against the pound.
Matt Abraham
Caxton FX
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Thursday, 7 July 2011
ECB raises rates and indicates further tightening is possible
The ECB has delivered on last month’s rate rise promise, taking the eurozone base rate to 1.50%. The Bank of England threw up no surprises today, keeping the UK rate at 0.50%.
In line with expectations, the ECB has gone ahead with the rate rise it signalled last month with the phrase “strong vigilance” in relation to upside risks to inflation. The rate rise is the last thing the struggling periphery needs right now, but the ECB sticks to its price control mandate very strictly.
Despite some strong German factory orders data this morning, there is growing evidence of an economic ‘soft patch’ being experienced in the eurozone, in line with a global trend. It will be interesting to see what this rate rise does to eurozone growth in the second half of this year. Trichet was actually pretty hawkish, stressing that the ECB will continue to monitor eurozone inflation closely. The door was definitely not closed to a third ECB rate rise this year. If eurozone inflation ticks up later this year, you can be pretty sure the ECB will move again, unlike the BoE.
The euro has received a slight boost as a result, concludes Driver:
The market has responded fairly positively to Trichet’s comments as the euro has gained a little traction for the first time this week. The Portuguese debt downgrade headlines have really weighed on the single currency this week, but the ECB’s monetary policy gives the euro plenty of upside potential regardless of peripheral concerns. Sterling has climbed against the euro this week, but gains may prove hard to sustain with UK second quarter GDP likely to an awful figure at the end of this month.
We are bearish on sterling; it will benefit against the euro when these peripheral issues weigh in the short-term, but the absence of UK growth or monetary tightening really is the bottom line. Likewise for the euro, peripheral issues may weigh in the short-term but interest rate differentials and sovereign diversification will continue to spur the euro on.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
In line with expectations, the ECB has gone ahead with the rate rise it signalled last month with the phrase “strong vigilance” in relation to upside risks to inflation. The rate rise is the last thing the struggling periphery needs right now, but the ECB sticks to its price control mandate very strictly.
Despite some strong German factory orders data this morning, there is growing evidence of an economic ‘soft patch’ being experienced in the eurozone, in line with a global trend. It will be interesting to see what this rate rise does to eurozone growth in the second half of this year. Trichet was actually pretty hawkish, stressing that the ECB will continue to monitor eurozone inflation closely. The door was definitely not closed to a third ECB rate rise this year. If eurozone inflation ticks up later this year, you can be pretty sure the ECB will move again, unlike the BoE.
The euro has received a slight boost as a result, concludes Driver:
The market has responded fairly positively to Trichet’s comments as the euro has gained a little traction for the first time this week. The Portuguese debt downgrade headlines have really weighed on the single currency this week, but the ECB’s monetary policy gives the euro plenty of upside potential regardless of peripheral concerns. Sterling has climbed against the euro this week, but gains may prove hard to sustain with UK second quarter GDP likely to an awful figure at the end of this month.
We are bearish on sterling; it will benefit against the euro when these peripheral issues weigh in the short-term, but the absence of UK growth or monetary tightening really is the bottom line. Likewise for the euro, peripheral issues may weigh in the short-term but interest rate differentials and sovereign diversification will continue to spur the euro on.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Tuesday, 21 June 2011
Fed monetary policy decision tomorrow: what's going to happen?
There is little pushing the Fed to tighten policy. The US is not suffering from the same price pressures as other economies and labour market improvement remains the Fed’s number one concern. Moreover, there have emerged serious question marks over the US economic outlook amid a raft of awful growth figures. The Fed and BoE policy outlooks are very similar; tighter policy can only be considered when sustained growth emerges. The threat of a double-dip recession in both economies remains realistic, and premature tightening could be the tipping point.
Accordingly, we are probably looking at the middle of next year for a Fed rate hike. Bernanke looks highly likely to maintain his “extended period” rhetoric with regard to the Fed’s current ultra-loose monetary policy. However, a third round of quantitative easing would probably only be resorted to if the US did fall back into negative growth. Bernanke is likely to stress the recent weakness of US growth and in the absence of any hints to future tightening, the US dollar looks likely to come under a little pressure. The dollar will remain weak for many months to come, but hopes for hawkish Fed rhetoric are so sparse that we are unlikely to see the greenback suffer any major losses for today at least.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Accordingly, we are probably looking at the middle of next year for a Fed rate hike. Bernanke looks highly likely to maintain his “extended period” rhetoric with regard to the Fed’s current ultra-loose monetary policy. However, a third round of quantitative easing would probably only be resorted to if the US did fall back into negative growth. Bernanke is likely to stress the recent weakness of US growth and in the absence of any hints to future tightening, the US dollar looks likely to come under a little pressure. The dollar will remain weak for many months to come, but hopes for hawkish Fed rhetoric are so sparse that we are unlikely to see the greenback suffer any major losses for today at least.
Richard Driver
Analyst – Caxton FX
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Tuesday, 14 June 2011
UK inflation hits expectations and fails to move the markets
With interest rate policy one of, probably the major driver in the currency market, inflation data is key. The main tool to control inflationary pressures is through tighter monetary policy; that is to say, by raising interest rates. A high inflation figure increases the likelihood of an interest rate rise, or at least brings forward expectations of such a rise.
Today’s UK inflation figure for the month of May came in at 4.5% y/y, the same figure as the previous month (though prices rose by 0.2% on the month). This was in line with median forecasts and as such, failed to trigger any major sterling moves.
In fact it was the rumour of a weaker figure (4.3%), which surfaced in the half hour leading up to the 9:30am announcement and moved the markets the most. Sterling fell 40 pips or so against the dollar and 30 pips or so against the euro as suspicions mounted. A weaker figure would really have eased the pressure on the MPC to contain inflation through an interest rate rise, and sterling would probably have sold off quite badly.
The 4.5% does little to change market expectations of a rate rise, which remain delayed until 2012. The MPC have expressed that they see UK inflation hitting and perhaps exceeding 5.0% in coming months. They have also repeatedly confirmed (with a couple of exceptions) that UK growth is too fragile to accommodate an interest rate rise. Indeed, figures from the UK economy have been extremely disappointing of late, and we look set to learn of another poor quarter of growth.
Some brave forecasters are betting on a November UK rate rise, predicting inflation will head too high for the MPC to keep sitting on their hands. We just can’t see this happening, we are probably more pessimistic than consensus, and are looking to the second quarter of 2012 for a UK hike.
Where does this leave sterling? Well, broadly unchanged. We still remain in wait for decent growth figures, which are unlikely to come this week. UK retail sales are due out on Thursday, and are expected to show a contraction after April’s bumper month. Sterling has enjoyed a strong start to the week, but it could well come under pressure in coming sessions.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Today’s UK inflation figure for the month of May came in at 4.5% y/y, the same figure as the previous month (though prices rose by 0.2% on the month). This was in line with median forecasts and as such, failed to trigger any major sterling moves.
In fact it was the rumour of a weaker figure (4.3%), which surfaced in the half hour leading up to the 9:30am announcement and moved the markets the most. Sterling fell 40 pips or so against the dollar and 30 pips or so against the euro as suspicions mounted. A weaker figure would really have eased the pressure on the MPC to contain inflation through an interest rate rise, and sterling would probably have sold off quite badly.
The 4.5% does little to change market expectations of a rate rise, which remain delayed until 2012. The MPC have expressed that they see UK inflation hitting and perhaps exceeding 5.0% in coming months. They have also repeatedly confirmed (with a couple of exceptions) that UK growth is too fragile to accommodate an interest rate rise. Indeed, figures from the UK economy have been extremely disappointing of late, and we look set to learn of another poor quarter of growth.
Some brave forecasters are betting on a November UK rate rise, predicting inflation will head too high for the MPC to keep sitting on their hands. We just can’t see this happening, we are probably more pessimistic than consensus, and are looking to the second quarter of 2012 for a UK hike.
Where does this leave sterling? Well, broadly unchanged. We still remain in wait for decent growth figures, which are unlikely to come this week. UK retail sales are due out on Thursday, and are expected to show a contraction after April’s bumper month. Sterling has enjoyed a strong start to the week, but it could well come under pressure in coming sessions.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Thursday, 9 June 2011
Euro suffers despite July ECB rate rise promise
The Bank of England kept interest rates on hold at 0.5% today, as it has done every monthsince March 2009. In reality, there wasn’t even an outside chance of a UK rate rise - the UK growth figures have just been too poor of late. Long-term sabre-rattler Andrew Sentance left the MPC last month, and now Mervyn King and his MPC doves are more in control than ever. Even if they did wish to change stance, the MPC would struggle to justify a rise before 2012, with growth so weak and household incomes so squeezed.
The IMF cut its forecast for UK growth in 2011 from 2.0% to 1.5% earlier this week, and we could well be in for a second quarterly growth figure as low as 0.2%. Mervyn King has repeatedly indicated that the UK’s soaring inflation levels are down to temporary factors that will subside next year, so the MPC are likely to ride out these high prices. With UK growth so soft, King is loath to hit the British economy with higher borrowing costs. Indeed, this morning’s UK trade balance data suggested consumer demand is really suffering at present, which took the shine off a narrowed deficit.
Unsurprisingly, the market didn’t respond to the BoE’s announcement; the release of the MPC minutes in a fortnight is likely to prove more market-moving. The market didn’t respond to the ECB’s unchanged 1.25% interest rate either. However, the market has moved since Trichet's press conference, and it has been a significant move.
Trichet delivered on the “strong vigilance” message with regard to upside risk to price stability, so a July rate rise is now more or less guaranteed. However, the euro has suffered a substantial slide on the news. The July rate rise was clearly fully priced in and traders have obviously seen now as an opportunity to take profit; the euro has given away half a cent to sterling, and over a cent to the US dollar. This may also be a reflection of some disappointment that Trichet refused to give any signal as to rate rises beyond July.
Despite the euro’s fall, the long-term outlook for a strong euro remains intact. Though with the market likely to refocus on the Greek situation in coming sessions, the euro could have some further downside in the short-term. Only when a Greek resolution arrives is the euro likely to really kick on from here. Sterling still looks fundamentally weak; none of its gains today have been made on its own merits.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
The IMF cut its forecast for UK growth in 2011 from 2.0% to 1.5% earlier this week, and we could well be in for a second quarterly growth figure as low as 0.2%. Mervyn King has repeatedly indicated that the UK’s soaring inflation levels are down to temporary factors that will subside next year, so the MPC are likely to ride out these high prices. With UK growth so soft, King is loath to hit the British economy with higher borrowing costs. Indeed, this morning’s UK trade balance data suggested consumer demand is really suffering at present, which took the shine off a narrowed deficit.
Unsurprisingly, the market didn’t respond to the BoE’s announcement; the release of the MPC minutes in a fortnight is likely to prove more market-moving. The market didn’t respond to the ECB’s unchanged 1.25% interest rate either. However, the market has moved since Trichet's press conference, and it has been a significant move.
Trichet delivered on the “strong vigilance” message with regard to upside risk to price stability, so a July rate rise is now more or less guaranteed. However, the euro has suffered a substantial slide on the news. The July rate rise was clearly fully priced in and traders have obviously seen now as an opportunity to take profit; the euro has given away half a cent to sterling, and over a cent to the US dollar. This may also be a reflection of some disappointment that Trichet refused to give any signal as to rate rises beyond July.
Despite the euro’s fall, the long-term outlook for a strong euro remains intact. Though with the market likely to refocus on the Greek situation in coming sessions, the euro could have some further downside in the short-term. Only when a Greek resolution arrives is the euro likely to really kick on from here. Sterling still looks fundamentally weak; none of its gains today have been made on its own merits.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Wednesday, 8 June 2011
Moody's: Causing trouble in the UK and the EU.
The pound suffered a sharp decline this morning following media reports that the UK could lose its AAA credit rating if the government failed to meet its economic and fiscal targets. Moody’s had made similar indications in March, but the market responded nonetheless. However, sterling has recovered to finish slightly higher than where it started the day against the euro, though it has lost ground to US dollar.
The warning from Moody’s tells us little that we don’t already know. If the UK economy remains teetering on the edge of a double dip recession and if the government cannot reduce its enormous deficit, then it stands to reason that we should lose our AAA rating.
The pound is a very unappealing asset at present but today’s news is barely news, it merely states the obvious. However, data has been reasonably scarce this week and investors were prompted to act.
Moody’s has also been in the news on a potentially much more crucial matter. On the Greek debt issue, Moody’s has made its feeling known on the ECB’s endorsement of a rollover of Greek bonds. Trichet has given his support to the measure of requiring Greek bondholders to reinvest their funds in Greece upon the maturity of existing debt. A Moody’s head has classified such an event as a default, because it is a significant change to the terms of the initial agreement, and the rollover would almost certainly not be voluntary.
What’s more, as an FT Alphaville blog notes, if the ECB was seen to allow an effective default, this would trigger the downgrading of other peripheral nations’ debt, and so the contagion risk is highlighted again. So from this perspective, the ECB can dress it up as ‘soft restructuring’ all it likes, but the ratings agencies and market may see it as another thing altogether. So while most are confident a resolution will come soon, this does not necessarily rid the eurozone of the threat of debt contagion.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
The warning from Moody’s tells us little that we don’t already know. If the UK economy remains teetering on the edge of a double dip recession and if the government cannot reduce its enormous deficit, then it stands to reason that we should lose our AAA rating.
The pound is a very unappealing asset at present but today’s news is barely news, it merely states the obvious. However, data has been reasonably scarce this week and investors were prompted to act.
Moody’s has also been in the news on a potentially much more crucial matter. On the Greek debt issue, Moody’s has made its feeling known on the ECB’s endorsement of a rollover of Greek bonds. Trichet has given his support to the measure of requiring Greek bondholders to reinvest their funds in Greece upon the maturity of existing debt. A Moody’s head has classified such an event as a default, because it is a significant change to the terms of the initial agreement, and the rollover would almost certainly not be voluntary.
What’s more, as an FT Alphaville blog notes, if the ECB was seen to allow an effective default, this would trigger the downgrading of other peripheral nations’ debt, and so the contagion risk is highlighted again. So from this perspective, the ECB can dress it up as ‘soft restructuring’ all it likes, but the ratings agencies and market may see it as another thing altogether. So while most are confident a resolution will come soon, this does not necessarily rid the eurozone of the threat of debt contagion.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
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