Caxton FX Weekly Round-Up: UK GDP figure looms

Sterling continues to decline ahead of key UK GDP figure

We take no pleasure in reporting yet more bad news from the UK economy, which reported a 0.1% contraction in retail sales in December. There is unlikely to be much of a let-up for the pound, with Wednesday’s UK labour market not expected to provide much inspiration. Also released on Wednesday are the MPC minutes from the rate-setting committee’s meeting a fortnight ago. We are expecting David Miles to remain the lone dove in the MPC by voting for more QE. The other eight voters are likely to be convinced to keep their powder dry by persistently high inflation and further evidence of improved credit conditions due to the Funding for Lending Scheme. Weak growth figures may have convinced one or two to vote for QE however.

Sterling will struggle to benefit much from the minutes, with Friday’s UK GDP figure for Q4 2012 likely to be very disappointing indeed. The consensus market forecast rests at -0.2% but we are inclined to believe that a more significant contraction will be confirmed, with a -0.4% showing by no means beyond the realms of possibility. More bad news is in store for the pound in the short-term then. However, with sentiment so weak towards the UK economy now, we increasingly have to question just how much more damage bad data can do to the pound.

Indeed, broadly weak government borrowing and CBI industrial order expectations data have not left a mark on sterling today. As a result of the former figure, speculation has inevitably been boosted that the rating agencies are circling the UK’s triple-A credit rating. We must admit, a downgrade will surely be dealt in the coming weeks. What is not certain is how much this would affect the pound; the UK has never suffered a rating downgrade and as such we are in uncharted territory. We know from the example of the US downgrade last summer that the dollar emerged unscathed, but this may not necessarily be true of the pound.

News from Europe generally positive though concerns still linger

We have seen a very impressive German economic sentiment survey emerge today, which has given the euro further support. However, the accompanying press release points to only moderate economic growth from Germany in 2013 and we certainly don’t have high hopes for much more than 0.3% GDP growth as waning demand from eurozone partners continues to bite Germany’s exporters.

Thursday morning brings the monthly installment of eurozone PMI growth figures. Markit - the compilers of the PMI surveys - has claimed that the “worst is over” with respect to eurozone growth and expectations are for modest improvements across the board, though the indicators remain deep in recession territory.

End of week forecast

GBP / EUR	1.1800
GBP / USD	1.5770
EUR / USD	1.3400
GBP / AUD	1.4900

Sterling has regained the €1.19 level this morning but we doubt the market is done with the downside yet. The 85p EUR/GBP level remains very much in sight, which amounts to €1.1765.

Sterling is looking equally vulnerable against the US dollar, having fallen through some key levels. $1.5770 is the next big support level for GBP/USD. Arguably, the best sterling can hope for is that the market sees fit to take profit on betting against it of late, fearful of an upside surprise within Friday’s UK GDP figure.

Richard Driver

Currency Analyst

Caxton FX

UK retail sales deals another shocking blow to the pound

If there were ever any lingering hopes that the UK economy avoided a contraction in Q4 2012, this morning’s awful UK retail sales figure should have done enough to put them to bed. The figures confirmed that retail sales actually contracted in December (December!) by 0.1%, instead of the meagre 0.2% growth that was expected. This means that over Q4 as a whole, retail sales contracted by a whopping 0.6%.

It doesn’t come as much of a surprise that online sales still did well over December, while there was plenty of demand for fuel, while clothing sales at least avoided a drop. However, food and household goods did very poorly indeed.

As a result, sterling has taken a pounding (excuse the pun) in recent sessions but today has been all about losses against the US dollar. Sterling has dropped below $1.59 today, which represents a two-month low.

With the UK GDP figure for Q4 likely to confirm negative growth next Friday (Jan 25), it’s hard to see where sterling is going to attract investment from in the near-term. That said, we still think that most of the weakness in the UK economy has been priced into the pound by now. Let’s just hope that the snowy weather passes quickly because the UK economy needs to be operating at full capacity to avoid another contraction in Q1 2013, which would leave the UK in a dreaded triple-dip recession. On a brighter note, reports from the high street suggest the January sales are going well – there is hope!

Richard Driver 

Currency Analyst 

Caxton FX

                                                                     

Caxton FX Weekly Update: GBP, EUR, USD

Draghi fuels a major euro rally

After some early weakness in the initial sessions of 2013, the euro has made some staggeringly strong gains in the past few days. ECB President Draghi is primarily responsible for the move, quashing speculation that the central bank will elect to cut interest rates again in the coming months. The ECB was unanimous in its vote against a rate cut, a measure that was hinted at in its December meeting.

Draghi celebrated the easing of pressures in the eurozone financial system and whilst noting further likely weakness in the region’s economy well into the first half of 2013, Draghi did predict calming conditions would result in an upturn in growth later on in the year. IMF Chief Christine Lagarde lent the euro some further support by corroborating this view this morning.

In the short-term though, eurozone growth data is likely to remain weak. Only this morning we have had confirmation of an unexpected contraction of industrial production in the region. However, unfortunately for the GBP/EUR pair, the euro is not responding to weak eurozone figures at the moment. The same cannot be said of sterling’s relationship to UK data.

More doom and gloom for the UK economy

The UK economy is about as dark and gloomy as its weather at present. Last week brought yet more evidence that the UK economy contracted (the latest estimate is a 0.3% contraction). The week ahead is likely to confirm that UK inflation remained at 2.7% last month, while Christmas spending should produce an improved UK retail sales figure on Friday.

Nonetheless, sterling is likely to remain out of favour until after the Q4 UK GDP figure is announced on Jan 25 but if the current snowy weather continues, a bounce back into positive growth territory may be delayed until later on in Q1.

Market hoping for clarity on QE3 this evening

There has been no shortage of indications that within the Fed there is plenty of support for discontinuing the central bank’s QE3 operations. The hawks have had their say but Bernanke falls within the dovish camp and it would be no surprise to see him adopt his customary cautious stance and fail to signal an end to QE3 in 2013. This would not be good for the US dollar in the short-term but expect plenty of volatility overnight either way, as the market hangs on the Fed Chairman’s every word.

There is plenty of significant US economic data out this week, which will be relevant to QE3 expectations. It’s a full calendar including consumer sentiment, employment, housing, manufacturing and retail sales data. This will need to be solid if the US dollar is to bounce back in the short-term.

End of week forecast

GBP / EUR	1.1950
GBP / USD	1.61
EUR / USD	1.3450
GBP / AUD	1.5350

Sterling is trading at a rather alarming (depending on your interests) nine-month low of €1.2025. We maintain a positive outlook for GBP/EUR as a whole but we did note downside risks in January, though admittedly we did not anticipate such a drastic downside move.

Sterling continues to tread water above the $1.60 level and may continue to do so for a little while longer, though by the end of Q1 2013 we do see this pair well below $1.60. For now, this pair trades half a cent above this psychological threshold.

Richard Driver

Currency Analyst

Caxton FX

The Outlook for Sterling in 2013

Caxton FX is anticipating GBP/EUR to bounce back from its recent weakness and finish 2013 closer to the €1.30 level. Meanwhile, our projections for GBP/USD are far more pessimistic; we expect the rate to make a sustained move below $1.60, finishing the year near the $1.50 benchmark.  

GBP/EUR

Tensions in the eurozone have eased in recent months but so many of the region’s fundamental problems remain unresolved. Accordingly, we expect GBP/EUR’s longer-term recovery to be resumed over the course 2013.

The UK’S stuttering economy is the key factor holding the pound back at present. Another quarterly contraction is likely to be confirmed on Jan 25, which will intensify market nerves with respect to a possible triple-dip recession and a probable loss of the UK’s prized AAA credit rating. Despite what is likely to be minimal economic growth this year, we are not expecting the Bank of England to engage in further quantitative easing, which should be supportive of the pound.

Growth in the eurozone is even weaker and we expect the region to remain in recession for a while longer yet. We expect bond market pressures to ramp up again and Spain to be forced into a bailout request, while Greece will almost certainly return to the headlines. This year’s elections in Italy and Germany also pose significant risks to the euro.  

With UK economic data so weak, GBP/EUR faces significant short-term risks. However, we expect GBP/EUR to regain the €1.25 level by the middle of the year, before finishing 2013 closer to €1.30.

GBP/USD

We believe sterling is over-valued against the US dollar. The US economy is still enjoying moderate expansion in a low-growth global economy, to which the US Federal Reserve looks set to respond by ending its QE3 programme in the second half of the year. As the two dominant global currencies, our projections for a weaker EUR in 2013 dictate a firmer outlook for the greenback.

Weak global growth and the absence of a resolution to the debt problems in the US and the eurozone should maintain plenty of safe-haven demand for the USD this year. The Bank of Japan and the Swiss National Bank are engaged in currency intervention to weaken the JPY and CHF, so the USD will continue to enjoy status as the prime safe-haven currency of choice.

GBP/USD is not too far away from its recent 16-month highs of $1.63 at present but we expect this pair to spend most of this year below the $1.60 benchmark. A return to last year’s levels around $1.55 looks probable with significant risks of a move as low as $1.52. 

Weekly Summary: Dollar on the up

US dollar makes a strong start to 2013

The US dollar made a horrible finish to 2012 but the currency has enjoyed a resurgence in the first few sessions of 2013. The Fed has given the greenback a much needed helping hand by indicating that it has limits in sight with respect to QE3. The Fed is very unlikely to conclude its QE3 operations in the first half of this year but a 2013 finish is very much on the cards, which is all good news for the USD.

The US fiscal cliff was averted by Congress last week and this sent global equities soaring, though the response in the foreign exchange markets was markedly more cautious. The dollar seems to be benefiting from lingering nerves over the need for the US to once again raise its debt ceiling and the risk of another US debt downgrade. Also aiding the dollar was a large degree of profit-taking on the EUR/USD pair’s climb up to $1.33.

At $1.63, sterling was looking very expensive at the turn of the year and has indeed been pulled back down to the $1.60 area by this recent dollar rally. Support at this level appears to be pretty robust however, which may give this pair some more time above the threshold (though we still believe it to be “borrowed”). However, we do note significant risks of another downward slide.

UK growth data disappoints to weigh on GBP

It’s not been a very happy start of the year as far as UK economic figures are concerned. The UK manufacturing sector saw some unexpected growth in December, the most in nine months, but the news from the construction sector and in particular the services sector was much less positive. The worst contraction in the UK services sector since the middle of 2009 is likely to ensure a negative GDP figure for Q4 2012, which is announced on January 24. We are not expecting the UK economy to continue contracting throughout 2013, though make no mistake the prospects of a significant upturn are pretty bleak.

The Bank of England meets this Thursday (Jan 10) and despite growth concerns we are expecting Mervyn King & Co to opt against the option of another dose of quantitative easing. Growing signs of success within the BoE/Government’s Funding for Lending Scheme, whereby bank lending is incentivized, are likely to be sufficient for most MPC members to hold fire on their QE votes.

End of week forecast

GBP / EUR	1.2350
GBP / USD	1.6050
EUR / USD	1.30
GBP / AUD	1.5350

Sterling is still at a very respectable rate against the US dollar and exchanging at current levels is still a decent result. Against the euro, this is far less the case. Yes, the rate has bounced off its 8-month lows around €1.2150, but it is still hard to view these levels of €1.23 as attractive to buy euros. We do maintain our outlook for a weaker euro this year, which should see a return to the €1.25 level, though we may well have to be patient amid such disappointing UK economic figures. For January trades, this may be close to as good as it gets with a poor UK GDP figure on the horizon.

Richard Driver
Currency Analyst
Caxton FX 

January Outlook: GBP/EUR/USD

The end of 2012 was characterised by euro strength and dollar weakness, with sterling’s performance falling somewhere in between. We have seen GBP/USD rally to fresh highs lately, while GBP/EUR has posted new multi-month lows. Whilst our central scenario is that we will see these two trends reversed over the course of 2013, we note significant short-term risks to sterling vis-à-vis the euro. A weak UK GDP figure for Q4 2012 or a loss of the UK’s AAA credit rating are likely to keep GBP/EUR below €1.25 in the coming weeks, which is significantly below where we see it trading by this time next year.

GBP/EUR

Sterling suffering from UK triple-dip fears

December’s growth data pointed to a disappointing slowdown in November, with the UK’s key services sector only narrowly avoiding a monthly contraction. We have been warned in no uncertain terms by the Bank of England that the UK economy could well have contracted in Q4 2012. The available figures do indeed point to this, even if it is likely to be only marginal. Still, talk of a triple-dip recession is hardly going to foster a mood of confidence towards the UK recovery.

Looking ahead, the near-term outlook for UK growth is likely to be flat, as the economy wrestles with ongoing weakness in demand from the eurozone. We are simply not seeing the rise in UK exports that is necessary and with the eurozone poised to continue contracting throughout the first half of this year, this problem is unlikely to be addressed.

Chancellor George Osborne’s Autumn Statement, delivered in December, told us that the UK government is sticking to its guns on fiscal consolidation, which is likely to continue constraining growth, though we agree that this approach is essential. However, weak growth in combination with Osborne’s failure to make progress on bringing down the country’s soaring debt levels are likely to convince at least one of the major credit rating agencies to downgrade the UK’s triple-A rating. This is a risk for sterling, though we are among those who are sceptical about just how much this would hurt the pound.

In terms of BoE monetary policy, we still only have one MPC member (David Miles) voting in favour of more quantitative easing. The vast majority of the voters appear content to allow the effects of the Funding for Lending scheme to continue feeding through and unless we see evidence of further significant economic weakness, we don’t expect any more QE until at least the second half of 2013. As such, this month’s BoE meeting should yield no major developments, though the release of the MPC minutes on Jan 23 will be as closely watched as ever.

Euro strong but fundamentals point to a decline

As far as the euro is concerned, we have to admit that we are surprised to report GBP/EUR’s recent decline to an eight-month low below €1.2150. Supporting the euro is the fact that Greece is out of the woods for the time being and eurozone tensions have eased accordingly. The key driver of the euro’s resilience, as ever, is the perpetual diversification of USD into EUR by Middle and Far Eastern central banks. 

Nonetheless, we continue to foresee a euro decline through 2013, led by declining economic fundamentals and ongoing eurozone risks. It goes without saying that a weaker euro would benefit the eurozone economy. However, using rhetoric to this effect was a rather dicey move for EU officials last year, amid concerns over the very existence of the euro. We should see greater opportunity for policymakers to take advantage of calmer markets and talk up the merits of a weaker euro this year, without highlighting any existential crisis on the part of the single currency.

In terms of what to look out for this year, elections in Germany and Italy stand out as risk events, as does the likelihood of a Spanish sovereign bailout request sooner rather than later. Fortunately for the euro, Germany doesn’t go to the polls for another nine months, while Greece will likely stay out of the headlines for time being. Longer-term, we do expect the eurozone’s problem child to continue missing its targets, whilst there is also a risk of a breakdown of the Greek coalition.

Political uncertainty in Italy poses one of the most significant risks to the euro in the short-term; elections are likely to be held in March. This should put Spanish bond yields under pressure, as would a Moody’s downgrade of Spanish debt to junk status, which is looking probable based on comments made by the rating agency last October.

Sterling has bounced off its multi-month lows in the €1.2150 region and is currently trading around €1.2350. We expect this pair to remain fairly stable around this level in January, before edging back up towards €1.25 in the coming months.

GBP/USD

US steps away from the fiscal cliff

2013 has kicked off with a bang thanks to the rather predictable eleventh hour deal to avoid the US fiscal cliff. The absence of such a deal would have seen highly damaging tax rises and spending cuts coming into the force on January 1. The US Congress has taken a leaf out of the eurozone’s book by effectively kicking the can down the road but fiscal tightening will nevertheless be a major feature of the US economy this year. The Congressional Budget Office is expecting the US economy to grow by around 2.0% in 2013, which factors in a 1.4% reduction due to spending cuts.

The fact is that nothing of any real substance has yet been decided on American fiscal reform. The next two months will be the subject of further fierce negotiations on what cuts are made and where. The dysfunction of the US political system over recent years almost guarantees a further headline grabbing crisis in the coming months. Indeed, Moody’s and Standard & Poor’s have ramped up the pressure by branding this week’s deal “insufficient.”

Where does this all leave the GBP/USD pair? Well, the dollar has performed remarkably poorly in recent weeks and sterling actually mustered the strength to rally to an impressive fifteen-month high of $1.6380 in early New Year trading. However, the dollar is showing some initial signs of a rebound with this pair having retreated by over two cents from the aforementioned high.

Buying USD above $1.60 remains attractive

Put simply, we have seen any level above $1.60 as a strong opportunity to buy USD for a while now, so current levels of $1.6150 still look highly attractive. We have to admit that this pair finished 2012 significantly higher than we expected, but we remain confident that the greenback will find its feet in 2013. Behind this is a belief that economic fundamentals will acquire a greater share of market focus this year. With the US economy easily outpacing its US and UK counterparts, even after the effects of fiscal consolidation are factored in; increased focus on economic performance should benefit the greenback. In the short-term though, January should provide some more shelf-life for this pair above $1.60.

One month direction:

GBP/EUR: €1.2375

GBP/USD: $1.61

EUR/USD: $1.30

Richard Driver

Currency Analyst

Caxton FX

Caxton FX Currency Round-Up: GBP/EUR, GBP/USD

Euro under pressure as ECB indicates cut to deposit interest rates 

The euro has been hit by a few different factors in the past few sessions. ECB President Draghi gave the single currency a knock last Thursday by revealing that whilst there would be no change to the Bank’s policy this month, we might expect some monetary easing next year. From Draghi’s comments, we no longer draw the conclusion that the ECB will cut the headline interest rate in Q1 next year. However, there were real indications that if growth disappoints and eurozone nerves spike in the coming months, we could see a cut to the deposit rate in a bid to encourage banks to step up lending.

Both the ECB and the German central bank (the Bundesbank) have delivered some fairly gloomy growth predictions in the past week. The former now sees the eurozone economy contracting by 0.3% next year, after previously predicting growth of 0.5%. Meanwhile, the Bundesbank disappointingly slashed its forecasts for German growth next year; reducing its June forecast of 1.6% growth to 0.4%.

We have had some good news today on the German front however, with a key economic sentiment survey hitting a seven month high. The latest sentiment and confidence surveys out of Germany suggest the country may narrowly avoid a recession, though a contraction in Q4 2012 looks highly likely. The German economy may not be in as weak as many had expected but the hopes for the rest of the eurozone are rather dimmer. This could well be highlighted by Friday morning’s eurozone PMI growth figures.

Italy hits the headlines as PM Monti announces resignation plans

Technocratic Italian PM Mario Monti dropped a bomb over the weekend by announcing his intention to resign once the Italian parliament has passed its 2013 budget. Berlusconi is waiting in the wings but his approval ratings suggest this is too big a mountain for even him to climb. Nonetheless, this political uncertainty - which raises serious question marks over Italy’s ability to deliver the necessary cuts and economic reforms to keep bond yields stable - could weigh on the euro significantly in the coming weeks and months.

All eyes on US Federal Reserve QE decision

Last week’s surprisingly strong figures from the US labour market are unlikely to satisfy the US Federal Reserve at its meeting over the next two days. We expect the Fed to decide to replace Operation Twist (which is set to be concluded) with a further $40bn in asset purchases, to bring its QE programme up to $80bn per month. There are various tweaks that the Fed can make to its monetary policy, to which the US dollar will respond differently. Given that sterling is trading at a very healthy rate of $1.61 at present, we would urge dollar-buyers to act now.  

End of week forecast

GBP / EUR	1.2450
GBP / USD	1.60
EUR / USD	1.29
GBP / AUD	1.53

Sterling has enjoyed a welcome little recovery against the euro amid some rather negative eurozone developments. At €1.24, we have not abandoned hopes of one last push for €1.25 before the end of the year. There is not much to get excited about with respect to sterling at present but we do expect enthusiasm towards the euro to wane from here. A move below €1.23 is looking increasingly unlikely.

Richard Driver
Currency Analyst 
Caxton FX

Osborne's Autumn Statement

George Osborne provided few surprises in his Autumn Statement earlier today. Growth projections for the UK economy were revised down significantly from over-optimistic figures from the March Budget. Tight credit conditions and external dangers will ensure a rocky recovery for the UK economy over the next few years. One notable success though has been the UK labour market, which has showed some strong improvements this year, with 1.2m extra jobs found under the current government. 

A key theme to take from the Office of Budget Responsibility is that the UK is in a weaker position in terms of both growth and its finances, when compared to the last update in March. This of course highlights the risks of a cut to the UK's AAA credit rating in the early months in 2013. In terms of sterling's performance in reaction to the day's events, the response has actually been pretty muted, which is a pretty good result in the circumstances.

Below is a summary of the key announcements made by George Osborne today.

Economy and Government Spending

·         The Office for Budget Responsibility expects GDP to contract by 0.1% in 2012, significantly down from forecasts of 0.8% growth in March. The OBR then expects the UK economy to grow by 1.2% next year.

·         The government’s fiscal consolidation programme is to be extended by another year to 2017/2018.

·         The UK budget deficit is set to fall from 7.9% last year to 6.9% this year.

·         National debt will not begin falling until 2016-17, a year later than previously expected.

·         UK unemployment is expected to peak at 8.3%, lower than initially expected, and employment is expected to rise every year moving forward.

Taxes

·         There is to be no new tax on property (“mansion tax”).

·         40% tax rate threshold will rise from £41,450 to £41,865 in 2014 and then £42,285 in 2015.

·         Corporation tax will be cut by another 1% in 2014, taking the rate to 21%.

·         Inheritance tax will rise by 1% in 2013.

·         Tax free allowance raise is to rise by £235 to £9,440.

·         Planned 3p rise in fuel duty not just postponed but cancelled.

Benefits and Pensions

·         Most working-age benefits to rise by 1% per year over next three years.

·         Child benefits are also to rise by 1% per year over two years from 2014. 

·         Tax relief on the largest lifetime pensions reduced from £1.5m to £1.25m starting in 2014-15, the annual allowance will now be £40k rather than £50k. 

December Monthly Report: GBP/EUR, GBP/USD

Greece drives euro rally but US fiscal cliff looms

Sterling was broadly unchanged across the exchange rates through November, except unfortunately (depending on your exposure, of course) against the single currency, where a significant decline was seen. We have seen some progress from the eurozone in recent weeks, from Greece in particular. A deal was struck to put the country’s debt on a more sustainable path, one that could give it a realistic chance of emerging out of the current crisis, though this is clearly many years away. Most importantly, the risk of a Greek exit and euro break-up has receded – the key factor behind the euro’s latest rally.

There has been something of a dark cloud hanging over the pound in recent weeks, caused by a mixture of negative UK data and pessimistic growth forecasts from the Bank of England. This in turn filtered into speculation that the UK could lose its AAA credit rating before long.

These factors haven’t stopped the pound from sustaining some very respectable levels against the US dollar however. There has been a marked improvement in growth data from the likes of the US, China and even the eurozone in recent weeks, which in combination with progress in Greece has lifted investor sentiment from a mid-November slump. However, with little progress being made on the US fiscal cliff issue, the dollar could well bounce back before the end of the year.

GBP/EUR

Sterling weak but downside limited despite weak UK data

It has been a difficult few weeks for this pair. The Bank of England brought the market crashing back down to earth with some pessimistic growth projections in the aftermath of the surprisingly strong Q3 UK GDP number (1.0%). Sir Mervyn King & Co have been very deliberate in managing our expectations with respect to the UK economy’s performance in the final quarter of the year, highlighting in the Quarterly Inflation Report that there are significant risks of another contraction.

November’s UK figures certainly didn’t point to a very robust start to Q4, with UK manufacturing sector growth contracting and the services sector giving its worst showing in almost two years. We also saw the worst UK claimant count update in over a year (after a very good few months it must be said).

The recent public sector net borrowing figure came in worse than expected thanks to tax revenues continuing to fall short, which painted a grim picture of George Osborne’s deficit-reduction plan. With Moody’s Investor Service having recently cut France’s AAA credit rating, many in the City are speculating that UK debt will be dealt the same hand before long. There is a high risk that one of the big rating agencies will swing their axe in the UK’s direction in the coming months and this has left its mark on sterling.

It hasn’t been all bad news as far as the pound is concerned. UK inflation ticked higher to 2.7% from 2.3%, which may have discouraged one or two MPC members voting for QE in their November meeting. The minutes from that meeting revealed that in fact only one voter, David Miles, was in favour of extending the BoE’s quantitative easing programme. On balance, we do not expect any further QE from the BoE, which should be supportive of the pound in the longer-term. However, persistently weak UK growth is likely to continue fuelling QE speculation. In addition, the MPC minutes appeared to remove the option of an interest rate cut for the “foreseeable future.”

Greek disaster avoided

 From the eurozone, November was very much Greece’s month. With a deal being struck to avoid an imminent default and bring Greek debt under some recognisable control, the market may be able to put this particular eurozone worry on the backburner to some extent. Nevertheless, there remains a high degree of scepticism towards Greece’s ability to meet its targets and towards a lack of detail within the agreement. We know that Greece will be granted longer to repay its debt and that interest rates on that debt will be lowered. However, it is unclear how the intended bond buy-back (at a discount) will be funded and when it will occur.

Spain has this week made a formal request for its crumbling bailout sector, which is a relief as far as the market is concerned. This isn’t to be confused with a sovereign bailout though and Spain will surely be the subject of the market’s cross hairs once again before long. We don’ think PM Rajoy will be able to avoid requesting a full blown bailout, given the dire state of economic growth and the still elevated borrowing costs that the country is facing (despite recent declines). Any realistic analysis of Spanish growth and debt dynamics over the coming years suggests that a bailout is inevitable.

Concerns over the wider eurozone growth issue in the eurozone have eased somewhat thanks to some recent updates. Germany and France both showed unexpected growth of 0.2% in the third quarter, while Italy contracted by half as much as expected (0.2%).  Nonetheless, we see nothing within the more forward-looking figures (despite the recent upturn in the German business climate) to suggest the eurozone can avoid a recession next year.

Sterling is trading at fairly weak levels around €1.23 at present and we are sticking to our long-term and long-held view that this pair’s upside potential outweighs its downside risks. Our hopes for a move towards €1.25 by the end of the year remain intact and, more importantly, realistic. In the short-term however, there is a strong risk of a move down towards €1.2250.

GBP/USD

Sterling soaring against soft US dollar, but for how long?

This pair’s downtrend has been interrupted in the past fortnight by developments in Greece, which have had a very uplifting effect on market conditions. The avoidance of a messy Greek default and euro-exit saw global equities rally, weakening the US dollar significantly. The $1.60 level has been recovered as a result but as ever we view sterling to be on borrowed time above this psychological threshold.

The US economy continues to show evidence of a strong finish to the year, demonstrated not least by the recent revised GDP figure for Q3, which revealed an annualised growth pace of 2.7%. Consumer confidence continues to climb and we are seeing the US housing and labour markets make further strides.

With the Greek ‘can’ kicked down the road, focus through to the end of the year is likely to be dominated by the US fiscal cliff issue. On January 1^st 2013, a series of sharp US tax rises and spending cuts are scheduled to come into being, unless negotiations between the Democrats and the Republicans bear some fruit in the coming weeks.

The fiscal cliff could as much as half US growth next year and in doing so dent the global recovery considerably; the stakes are extremely high. It is broadly for this reason that we expect US politicians to put some sort of compromise together, in the same way we expected Greek negotiations to produce a deal. Nonetheless, nervousness over this game of ‘chicken,’ which could well go right down to the wire, is likely to lead to increased demand for the safe-haven US dollar in the coming weeks.

Sterling is trading up at $1.61 level, which we view to be an excellent level at which to buy USD. In our view, sterling is highly unlikely to set fresh highs above this pair’s fifteen-month peaks in the $1.6250-1.6270 area. Sterling’s headroom is looking increasingly limited from here and we expect a move lower in the weeks ahead.  

Richard Driver

Currency Analyst

Caxton FX

Will the Reserve Bank of Australia cut interest rates in December?

We expected the Reserve Bank of Australia to cut interest rates at the start of November but Governor Stevens & Co decided to stay put with the 3.25% base rate. In our defence, this was pretty close to a 50:50 call. We still view the RBA as more likely than not to cut the rate by 0.25% in the early hours of next 

Tuesday morning (December 4^th). Of course, there are still clearly risks of another non-event, but in the last few days, the market appears to have come around to our way of thinking.

The minutes from the last RBA meeting were noticeably dovish, despite electing not to cut the interest rate, as indicated by the phrase “members considered that further easing may be appropriate in the period ahead.”

There have been mixed signs in terms of aussie data in the past month. Wage price growth data slowed right down, as did consumer inflation expectations, which both point to monetary easing. However, China’s manufacturing sector grew for the first in 13 months, which has made things a little more complicated.

The slowdown within the recent quarterly private capital expenditure figure has once again strengthened the case for a rate cut, as has this morning’s weak Australian private sector credit data. The decision last time was a close call; these figures should have tipped the balance in favour of a cut.

The peak in the mining boom is fast approaching, while the aussie government remains committed to fiscal tightening. The Australian economy should be in for an early Christmas present next week!

Richard Driver

Currency Analyst 

Caxton FX