What can I say, sterling is just leaving us with our mouths wide open. After last week’s disappointing production figures, it was easy to assume that today’s employment figures would just meet expectations. However, the light shone brightly on the UK this morning, and not only did claimant count smash expectations, but the unemployment rate dropped to 7.7%. All this does is boost market sentiment and confidence about the UK outlook. Now, as much as the UK has produced outstanding figures, one can only wonder about how this affects the BoE’s stance on interest rates and unemployment.
While it is unlikely that strong August figures will alter the central bank’s view on maintaining loose monetary policy, what should be noted is that the better the UK economy does, the more the market will question Governor Carney’s commitment to keep rates low at least until 2016. Today’s release of employment figures are even more crucial considering forward guidance outlined by the BoE.
Shouldn’t we really be thanking the central bank for its pledge to ensure low rates to promote growth, which considering recent figures seems to be doing the job? Yet you can’t help but ask: what about inflation? Currently inflation is above the central bank’s target at 2.8% and with growing domestic demand you must wonder how much further it can push. One thing we can be certain of is that if the recovery continues to be as robust as we have seen, the central bank may have to re-evaluate policy in order to ensure price stability. Not only will the market be listening attentively to the Inflation Report hearings tomorrow, but they will be also anticipating inflation figures released next week. When the going gets tough will Carney abandon his growth commitment and enforce price stability or vice versa? Either way, it looks like something will have to give.
Sasha Nugent
Currency Analyst
Caxton FX
Wednesday, 11 September 2013
Monday, 9 September 2013
Caxton FX Weekly Report: A fundamental week for the US dollar
Sterling shines brightly to begin the week
Last week was an impressive performance by sterling. PMI figures set up a winning week for the pound, and that was definitely evident against the euro and even the US dollar. Although Europe had a pretty rough end to the week, sterling managed to hold on to gains at least to start this week in control. With much quieter days ahead, the main releases this week are claimant count and the unemployment rate all due on Wednesday. Employment figures will be important considering forward guidance by the BoE. A disappointing industrial production figure gave Governor Carney some breathing room, however good employment figures will put the pressure back on the central bank governor. Better employment data will suggest the UK will reach a 7% unemployment rate quicker than the BoE predicts, fuelling speculation of an earlier than expected interest rate increase. The Inflation Report hearings on Thursday will gain plenty of attention considering Carney has made limited reference to inflation of late. Continued sterling momentum is possible mid-week if employment data provides upside surprise. However, with resistance at the €1.19 level sideways movement is likely to continue for the majority of this week with sterling gaining as we approach week end.
Big week for the US before taper decision
Friday ended badly for the dollar as non-farm employment data disappointed, while the July readings were revised downwards. Unemployment fell to 7.3% but this was a result of lower labour participation rather than an increase in people finding work. This fuelled more confusion in the market as to whether the US economy is in a good enough state to warrant a reduction in stimulus. This week will be a good occasion for US data to impress, ahead of the Fed meeting next week. Unemployment claims, retail sales and Preliminary UoM Consumer Sentiment are all due towards the end of the week and present the opportunity for the dollar to strengthen ahead of the monetary policy meeting. If data releases are as expected, GBPUSD levels of 1.56 could soon be a distant memory and levels of 1.54 will be more familiar.
Time is running out for the dollar if tapering is to begin in September. Depending on the outcome of US releases, we could see a big shift in dollar momentum at the end of the week. Overall the US recovery still seems strong and therefore we expect the dollar to encounter some sideways movement during the week, gaining a little momentum against both sterling and the euro as the week unfolds.
Cracks in German data begin to show
After signs of some resilience in August, the euro seems to have backtracked in the face of last week’s surge by the pound, resulting in the higher GBPEUR rate. Disappointing retail sales and Italian PMI data contributed to euro weakness. Poor German Factory Orders and industrial production data certainly fuelled the fire, coming in at -2.7% and -1.7% respectively. It seems even German data is beginning to falter, which does the euro no favours. This week is quiet in Europe on the data front although industrial production figures are due on Thursday. Thursday also sees the ECB monthly bulletin and ECB President Draghi’s speech, which will interest the market. It is unlikely the euro will be able to rebound against the dollar but we expect mostly sideways trading against sterling this week.
End of week forecast
GBP / EUR
|
1.19
|
GBP / USD
|
1.5625
|
EUR / USD
|
1.31
|
GBP / AUD
|
1.71
|
Sasha Nugent
Currency Analyst
Friday, 6 September 2013
Carney gasps for air
So it seems that this week Governor Carney has been pushed into a corner. With UK data flying high for the majority of this week and the UK recovery appearing more balanced, it is no surprise that this week the GBPEUR rate finally breached €1.18. Yesterday the BoE kept rates on hold at 0.50% (no surprise there), and didn’t make any accompanying statement. This may have been a wise call considering the market took everything it wanted from Governor Carney’s speech last week. However, “no comment” has repercussions, and yesterday we witnessed this as UK 10yr debt spiked to a two year high, above the 3% mark. Disappointing industrial production data and the awful trade deficit figure has managed to provide a little justification for the BoE’s stance. If next week’s employment data shows improvement in labour figures, then the pressure on Carney may rise again. After all, the market can’t really expect perfect data. Time is ticking on the policy front and although current policy may be warranted, the market still doesn’t seem too convinced.
Sasha Nugent
Currency Analyst
Wednesday, 4 September 2013
A great week so far for sterling
This week the UK has produced outstanding PMI figures with manufacturing, construction and Service PMI figures all smashing estimates suggesting that the UK is healthier and more stable than we previously thought. The pound has stuck its tongue out at the euro as the upswing in positive data has been reflected in the GBPEUR rate racing past 1.18, highs not seen since May this year. Even against the US dollar, sterling has showed that it isn’t a pushover, and if the US dollar is to strengthen, the Fed better make up their mind about if and when they will taper stimulus this year. The UK’s top class performance prompted the Confederation of British Industry to increase their UK growth forecast last month. Optimism about the UK outlook has continued this week and yesterday the OECD (Organization for Economic Cooperation and Development) released its growth forecast for the UK raising their estimates to 1.5% yearly growth from an earlier prediction of 0.8%.
The BoE rate announcement on Thursday could pull a dark cloud over recent sterling performance. If Governor Carney talks that dovish talk then we could well see the pound fall back (we may finally be convinced). Nevertheless, what the FX market cannot deny is that the outlook for the UK definitely deserves a thumbs up. Assuming it continues in this direction Carney’s commitment low interest rates may become questionable, and the market will not hesitate to give him a run for his money. After all, we haven’t even begun to rip apart effects to inflation, only then will his true colours have to show and we will see whether Carney can actually walk the walk.
The BoE rate announcement on Thursday could pull a dark cloud over recent sterling performance. If Governor Carney talks that dovish talk then we could well see the pound fall back (we may finally be convinced). Nevertheless, what the FX market cannot deny is that the outlook for the UK definitely deserves a thumbs up. Assuming it continues in this direction Carney’s commitment low interest rates may become questionable, and the market will not hesitate to give him a run for his money. After all, we haven’t even begun to rip apart effects to inflation, only then will his true colours have to show and we will see whether Carney can actually walk the walk.
Sasha Nugent
Currency Analyst
September 2013 Monthly Report: UK recovery moves from strength to strength
July was certainly a better month for sterling, taking advantage of struggling commodity currencies such as the aussie and kiwi. This was a result of a number of factors including better than expected data releases. The release of the BoE Inflation Report revealed forward guidance explaining that the outlook of interest rates will be linked to unemployment and inflation and that when ‘knock out’ conditions are breached, the monetary policy committee will have reconsider their stance on interest rates. Meanwhile the BoE minutes showed that MPC member Martin Weale voted against forward guidance because of the risk of rising inflation breaching the main goal of price stability. Upward revisions to the UK GDP reading has worked in the pound’s favour as well as strong PMI data also supporting the pounds uptrend.
The dollar on the other hand has begun to regain ground against major counterparts and the case of QE3 tapering rambles on. With September now underway, tension continues to build as to whether economic fundamentals provide enough reason for the Fed to reduce stimulus as soon as this month. Some economic releases such as Preliminary UoM consumer sentiment and new home sales did prove to be disappointing while housing data signals that unemployment is heading in the right direction. Nevertheless, the overall perception of the US economy remains fairly positive and speculation on whether the Fed will announce the beginning of tapering on September 18 remains.
The euro has been the bright spark recently with economic fundamentals surpassing expectations and boosting the views that maybe the eurozone recession is bottoming out. GDP figures have shown Q2 growth for the euroarea which has boosted investor confidence and encouraged EUR strength. Figures out of Germany have also favoured the euro and are becoming more and more like the glue holding the eurozone together. There is still plenty of worrying news out of the Euro area including high unemployment and the Greek funding gap issues which may present themselves as an increasing concern.
GBP/EUR
The UK economy is beginning to look much more stable than previously thought and the positive stream of UK data has worked in the pounds favour broadly speaking. The release of the Inflation Report and Bank of England policy meeting minutes provided the market with some clarity through forward guidance, which aimed to outline the direction of future interest rates.
The month of August saw the UK Service PMI figure jump to 60.2 and both manufacturing and industrial production exceeded estimates at 1.9%m/m and 1.1%m/m respectively. The good news continued through the month as the trade deficit narrowed to £8.1bn and inflation slowed to 2.8%. The upward revision to the Q2 GDP reading confirmed that recent positive stream of data was being reflected in improved UK output. Second quarter GDP was revised up to 0.7%qoq. The Confederation of British Industry raised their forecasts for expected GDP growth this year further supporting the view that the UK recovery is strengthening. CBI Industrial order expectations smashed predictions signalling businesses are more confident about the progress of the economy and are subsequently acting on it. Although the 0 figure doesn’t exactly scream an increasing order volume, it doesn’t signal a reduction in order volume either, and is therefore a step in the right direction.
The Bank of England Governor Mark Carney outlined in the Inflation Report that future interest rates will remain low until unemployment is at 7% which is expected in 2016. Initially this was taken pretty well by the market as it simply outlined what the market expected. However as UK data continued to impress, the likelihood that the unemployment rate will fall to 7% before the 2016 estimate increased resulting in upward pressure on the interest rate. The monetary policy meeting minutes revealed that committee member Martin Weale was against forward guidance on worries about the effect on inflation, proposing that a shorter timeline for considering rates would ensure price stability. This fuelled doubt about whether the Governor can actually ensure rates will remain at 0.5% with yields pushing higher, potentially threatening the recovery. In Carney’s first speech, the aim was to convince the market that he would be able to keep rates low until 2016 as expressed through forward guidance. This was partly successful in the sense that he reiterated the committee’s commitment to sustainable UK growth, revealing that the BoE may provide extra stimulus if the UK recovery is being threatened by rising market rates. On the other hand, with gilt yields rising on the back of his comments, it can be argued that he didn’t manage to achieve the objective of combat higher market rates. Investors seem to still believe that with the way the economy is going, a rate hike may be seen sooner and with inflation still well above the target at 2.8% it is understandable why.
The euro begins to get back on its feet
Better Eurozone fundamentals have seen the euro take control of this pair towards the end of last month, while good economic figures from the UK have been overshadowed. The first important signal came from Italy when its preliminary GDP reading showed the recession eased, contracting 0.2% q/q. Other fundamentals such as German, French and Eurozone GDP figures beat expectations, promoting confidence in the Euro area. PMI figures for Germany and the Eurozone were received well despite a disappointing figure from France.
Other German data releases such as the German IFO data and German ZEW Economic Sentiment came in above expectations boosting perceptions about the state of the German recovery and ultimately euro zone progress. Encouraging releases have fuelled suggestions that the positive movement in the EUR has been a result of German figures rather than an overall improvement in the region.
Problems in the Eurozone are persistent especially in Greece. It was revealed that the country will need another bailout after its current package is due to expire next year. The IMF has put the combined figure needed for Greece at €11.1bn for 2014 and 2015. Unemployment remains an issue throughout the eurozone, with Greek unemployment hitting 27.6% and the IMF sending Spain a warning about their unemployment rate currently at 26.3%. Imbalances within the area are evident as the German manufacturing and service sectors expanded while the French contracted.
After broadly trending upwards for most of August, we are likely to see the GBPEUR trend repeat itself next month. Despite the Eurozone showing sparks of improvement, the overall outlook for the UK is outpacing that of the eurozone. This week sees monetary policy announcements from both the BoE and ECB and although no rate changes are expected, the market will be drawn to the central banks’ comments on the state of both economies. We expect the GBPEUR rate to improve gradually from its current levels even though a dovish Carney and over optimistic euro investors could limit sterling gains.
GBP/USD
The month of August saw the UK Service PMI figure jump to 60.2 and both manufacturing and industrial production exceeded estimates at 1.9%m/m and 1.1%m/m respectively. The good news continued through the month as the trade deficit narrowed to £8.1bn and inflation slowed to 2.8%. The upward revision to the Q2 GDP reading confirmed that recent positive stream of data was being reflected in improved UK output. Second quarter GDP was revised up to 0.7%qoq. The Confederation of British Industry raised their forecasts for expected GDP growth this year further supporting the view that the UK recovery is strengthening. CBI Industrial order expectations smashed predictions signalling businesses are more confident about the progress of the economy and are subsequently acting on it. Although the 0 figure doesn’t exactly scream an increasing order volume, it doesn’t signal a reduction in order volume either, and is therefore a step in the right direction.
The Bank of England Governor Mark Carney outlined in the Inflation Report that future interest rates will remain low until unemployment is at 7% which is expected in 2016. Initially this was taken pretty well by the market as it simply outlined what the market expected. However as UK data continued to impress, the likelihood that the unemployment rate will fall to 7% before the 2016 estimate increased resulting in upward pressure on the interest rate. The monetary policy meeting minutes revealed that committee member Martin Weale was against forward guidance on worries about the effect on inflation, proposing that a shorter timeline for considering rates would ensure price stability. This fuelled doubt about whether the Governor can actually ensure rates will remain at 0.5% with yields pushing higher, potentially threatening the recovery. In Carney’s first speech, the aim was to convince the market that he would be able to keep rates low until 2016 as expressed through forward guidance. This was partly successful in the sense that he reiterated the committee’s commitment to sustainable UK growth, revealing that the BoE may provide extra stimulus if the UK recovery is being threatened by rising market rates. On the other hand, with gilt yields rising on the back of his comments, it can be argued that he didn’t manage to achieve the objective of combat higher market rates. Investors seem to still believe that with the way the economy is going, a rate hike may be seen sooner and with inflation still well above the target at 2.8% it is understandable why.
The euro begins to get back on its feet
Better Eurozone fundamentals have seen the euro take control of this pair towards the end of last month, while good economic figures from the UK have been overshadowed. The first important signal came from Italy when its preliminary GDP reading showed the recession eased, contracting 0.2% q/q. Other fundamentals such as German, French and Eurozone GDP figures beat expectations, promoting confidence in the Euro area. PMI figures for Germany and the Eurozone were received well despite a disappointing figure from France.
Other German data releases such as the German IFO data and German ZEW Economic Sentiment came in above expectations boosting perceptions about the state of the German recovery and ultimately euro zone progress. Encouraging releases have fuelled suggestions that the positive movement in the EUR has been a result of German figures rather than an overall improvement in the region.
Problems in the Eurozone are persistent especially in Greece. It was revealed that the country will need another bailout after its current package is due to expire next year. The IMF has put the combined figure needed for Greece at €11.1bn for 2014 and 2015. Unemployment remains an issue throughout the eurozone, with Greek unemployment hitting 27.6% and the IMF sending Spain a warning about their unemployment rate currently at 26.3%. Imbalances within the area are evident as the German manufacturing and service sectors expanded while the French contracted.
After broadly trending upwards for most of August, we are likely to see the GBPEUR trend repeat itself next month. Despite the Eurozone showing sparks of improvement, the overall outlook for the UK is outpacing that of the eurozone. This week sees monetary policy announcements from both the BoE and ECB and although no rate changes are expected, the market will be drawn to the central banks’ comments on the state of both economies. We expect the GBPEUR rate to improve gradually from its current levels even though a dovish Carney and over optimistic euro investors could limit sterling gains.
GBP/USD
Speculation on Fed tapering rambles on
During August there has been a considerable amount of evidence supporting the Fed case for reducing its asset purchasing program. Data has been mostly positive indicating that US growth is stable and the economy is picking up pace.
A number of Fed members have made statements claiming that the Fed’s decision to reduce stimulus will be dependent on the outlook of the US economy. As a result, investors have been eyeballing US data looking for signs on the strength of the recovery. Better than expected data releases such as ISM- non manufacturing PMI data and core retail sales have steered the market into predicting a reduction in stimulus. There has been some disappointing figures such as Preliminary UoM consumer sentiment as well as new home sales which provided doubts as to whether it is wise for the Fed to take their foot off the stimulus pedal however, data still suggest there are enough positive signals to assume tapering will take place this year.
Preliminary GDP figures which showed US output accelerated by 2.5% (consensus of 2.2%) simply brightened the US outlook and has triggered some dollar movement to the upside. Considering speculation has been on-going, the GBPUSD rate has been fairly resistant gradually rising through the most of August. As the case for tapering continues to build, we have begun to see a reversal, with the month end showing the beginning of a downward trend.
Whilst we expect data to continue to fan the tapering flame towards the end of this year, the market will be looking forward to the Fed rate announcement on September the 18th, which will indicate clearly whether we can expect tapering to begin as soon as this month. The possibility remains that the central bank may hold off this month, as a result of the mixed messages sent by recent data releases. Nevertheless, the fact remains that dependent on the outcome of economic fundamentals, tapering is still very much a possibility as we approach year end. Mixed data releases may prompt the Fed reduce stimulus at a slower rate ranging between $5bn- $10bn until the recovery becomes self sustainable. Good releases from the UK and optimism about the outlook will attempt to prevent the dollar rising, yet with the effects of possible tapering and a dovish Carney, it is unlikely that the pound will be able to withstand dollar gains, in spite of recent upward movement. Therefore we believe the downwards trend we have witnessed of late will continue though the month.
During August there has been a considerable amount of evidence supporting the Fed case for reducing its asset purchasing program. Data has been mostly positive indicating that US growth is stable and the economy is picking up pace.
A number of Fed members have made statements claiming that the Fed’s decision to reduce stimulus will be dependent on the outlook of the US economy. As a result, investors have been eyeballing US data looking for signs on the strength of the recovery. Better than expected data releases such as ISM- non manufacturing PMI data and core retail sales have steered the market into predicting a reduction in stimulus. There has been some disappointing figures such as Preliminary UoM consumer sentiment as well as new home sales which provided doubts as to whether it is wise for the Fed to take their foot off the stimulus pedal however, data still suggest there are enough positive signals to assume tapering will take place this year.
Preliminary GDP figures which showed US output accelerated by 2.5% (consensus of 2.2%) simply brightened the US outlook and has triggered some dollar movement to the upside. Considering speculation has been on-going, the GBPUSD rate has been fairly resistant gradually rising through the most of August. As the case for tapering continues to build, we have begun to see a reversal, with the month end showing the beginning of a downward trend.
Whilst we expect data to continue to fan the tapering flame towards the end of this year, the market will be looking forward to the Fed rate announcement on September the 18th, which will indicate clearly whether we can expect tapering to begin as soon as this month. The possibility remains that the central bank may hold off this month, as a result of the mixed messages sent by recent data releases. Nevertheless, the fact remains that dependent on the outcome of economic fundamentals, tapering is still very much a possibility as we approach year end. Mixed data releases may prompt the Fed reduce stimulus at a slower rate ranging between $5bn- $10bn until the recovery becomes self sustainable. Good releases from the UK and optimism about the outlook will attempt to prevent the dollar rising, yet with the effects of possible tapering and a dovish Carney, it is unlikely that the pound will be able to withstand dollar gains, in spite of recent upward movement. Therefore we believe the downwards trend we have witnessed of late will continue though the month.
GBP/EUR: €1.18
GBP/USD: $1.54
EUR/USD: $1.31
Sasha Nugent
Currency Analyst
Caxton FX
Caxton FX Weekly Report: UK outlook remains upbeat
UK PMI figures to support growth
This week is a fairly big week for the pound as a slew of UK PMI data will be released throughout the week as well as the all important rate announcement scheduled for midday Thursday. Construction and services PMI figures are expected to show expansion in all three industries whilst today’s release of manufacturing PMI was the highest in over 2 years, pointing to stable growth. Positive readings will increase speculation that the base interest rate may rise earlier than the BoE has predicted. The rate announcement due on Thursday is unlikely to see the central bank alter the base rate, however, the market will be listening attentively to the comments made by Carney following the release. After Carney’s speech last week we doubt anything said in Thursday’s accompanying statement will differ, however, the governor may use this opportunity to address the rising market rates. For the time being we feel that the pound will benefit from good data releases, rising gradually over the course of the week.
Could September be the month for QE tapering?
August ended on a high for the US dollar when preliminary GDP figures surprised to the upside reporting a 2.5%q/q increase. This contributes to mounting evidence that the US economy is experiencing a solid recovery. The US will release ISM manufacturing figures tomorrow, while other important figures such as unemployment claims, the unemployment rate and non-farm employment change are published later in the week. As the Federal Reserve monetary policy meeting draws closer, these figures will be of even more significance as they will either support the Fed’s case for reducing stimulus, or encourage policy to remain on hold. If data continues to surprise to the upside ahead of the September 18 meeting it will increase speculation that tapering could begin as soon as this month. Although mixed data results may suggest the will Fed hold off on reducing its quantitative easing programme for a little longer, the overall outlook for the US is still very positive and therefore we expect US dollar gains to continue gradually throughout the week.
Positive Spanish and Italian PMI data kick start a potentially good week for the Euro
The eurozone has been producing some good data of late which in response has resulted in the euro preventing sterling from extending gains. This morning Spanish and Italian PMI data was released showing the manufacturing sector expanded with both figures beating estimates at 51.1 and 51.3 respectively. These results indicate that growth in the manufacturing sector is visible across a number of the eurozone nations with even Greece’s decline easing. Services PMI data for Spain and Italy will be published later this week as well as retail sales and German industrial production. The main event this week will be the ECB rate announcement on Thursday, and although no change in policy is expected, it will be interesting to hear the views from the monetary policy committee on the state of eurozone economies. Although recent indications point to the eurozone stabilizing, with the outlook for the UK looking brighter and the US considering winding down their asset purchasing program, loopholes in other euro area fundamentals mean the odds are not in the euro’s favour. Good eurozone figures this week could limit sterling and US dollar gains but we do not see the euro strengthening considerably this week.
End of week forecast
GBP / EUR
|
1.18
|
GBP / USD
|
1.5475
|
EUR / USD
|
1.3190
|
GBP / AUD
|
1.7450
|
Currency Analyst
Caxton FX
Wednesday, 28 August 2013
Carney clarifies BoE interest rate outlook
In Mark Carney’s first policy speech, he put to bed worries about the MPC’s willingness to ensure the interest rate remains at 0.5%. The outlook on the UK economy has been looking increasingly positive, resulting in speculation that the unemployment rate will fall to 7% faster than the central bank is predicting and consequently push interest rates higher. In his speech to business leaders today, Carney said if interest rates tighten due to rising expectations “and the recovery seems to be falling short of the strong recovery we growth we need, we will consider carefully whether, and how best, to stimulate the recovery further.” He also reiterated that “Our forward guidance was clear that, although we would not reduce the stimulus until the recovery is secure, we would if necessary provide more”.
BoE Governor Carney’s objective has been achieved. Confidence that the central bank will aim to keep the interest rates low has been restored. Misinterpretation of earlier forward guidance comments gave the perception that the future of interest rates was solely dependent upon the unemployment rate. In his speech today, the Governor also cleared up that confusion and said “We are giving confidence that interest rates won’t go up until jobs, incomes and spending are recovering at a sustainable pace.” He noted that “Guidance provides you with certainty that interest rates will not rise too soon. Exactly how long they will stay low depends on the progress of the economy.” This highlighted that the bank has a potential strategy in place in case rate pressure continues. Using extra stimulus to support growth shows the central bank is not willing to compromise the strength of the recovery, and achieving healthy growth is a huge priority for the central bank as well as price stability.
As for convincing the markets that the committee has a plan in place, the Governor’s speech looks to have done the job. If price pressure unexpectedly gets out of hand however, the MPC may have to rethink their back up move of increasing stimulus.
Sasha Nugent,
Currency Analyst
Caxton FX
BoE Governor Carney’s objective has been achieved. Confidence that the central bank will aim to keep the interest rates low has been restored. Misinterpretation of earlier forward guidance comments gave the perception that the future of interest rates was solely dependent upon the unemployment rate. In his speech today, the Governor also cleared up that confusion and said “We are giving confidence that interest rates won’t go up until jobs, incomes and spending are recovering at a sustainable pace.” He noted that “Guidance provides you with certainty that interest rates will not rise too soon. Exactly how long they will stay low depends on the progress of the economy.” This highlighted that the bank has a potential strategy in place in case rate pressure continues. Using extra stimulus to support growth shows the central bank is not willing to compromise the strength of the recovery, and achieving healthy growth is a huge priority for the central bank as well as price stability.
As for convincing the markets that the committee has a plan in place, the Governor’s speech looks to have done the job. If price pressure unexpectedly gets out of hand however, the MPC may have to rethink their back up move of increasing stimulus.
Sasha Nugent,
Currency Analyst
Caxton FX
Tuesday, 13 August 2013
GBP/USD remains vulnerable ahead of QE3 tapering
Recently the UK has been experiencing an on-going stream of positive data reflecting progress on the outlook for the economy. However in recent weeks the GBP has failed to capitalise on the increased optimism provided by positive data.
The release of UK Services PMI data shocked the market by exceeding expectations at 60.2 from 56.9 previously. Furthermore, industrial and manufacturing data were also positive with 1.1%m/m and 1.9%m/m growth respectively. Despite all of this good news, GBP has struggled to strengthen against its major counterparts.
The market had been anticipating the BoE inflation Report outlining forward guidance on the direction of interest rates. The release of the report as well as BoE Governor Mark Carney’s comments was broadly in line with expectations, with the MPC accepting that the UK recovery is underway but confirming market concerns that the recovery is still weak by historical standards. Most importantly, Carney expressed that the MPC intends to “maintain the current highly stimulative stance of monetary policy” until employment data improves, similar to forward guidance provided by the Fed. So low rates are here to stay for a long time to come, but we knew this.
On the release of the report and the accompanying statement last week, the pound initially weakened, but soon rebounded sharply against the USD closing at 1.5489 from opening at 1.5349 on Wednesday. It seems like this was exactly what the market was waiting for to provide the GBP with that extra strength it deserved after recent positive economic signals. The release of some strong UK trade data presented the opportunity for the pound to post its biggest weekly gain in a month as the trade deficit narrowed.
The dollar started August on the back foot thanks to a disappointing non-farm payroll figure but figures since then have been rather more encouraging. ISM manufacturing data exceeded expectations at 56.0 and the trade balance figures were positive with the trade deficit narrowing to $34.2bn, supporting US GDP growth. This set of releases definitely provides evidence that the US economy is in recovery mode; however the lack of detail on the timing of possible QE3 tapering is putting pressure on the USD.
The market continues to wait for an indication of when QE3 tapering will take place and comments from Fed officials point to the need for better employment figures. Last week, the release of unemployment claims was positive, with the average number of jobless claims declining to 335,500(the lowest figure since 2007), thus providing another boost to the view of the US recovery. This has gone some way to reduce concerns after the July non-farm figure.
Bearing in mind both the UK and US have been releasing positive data, the outlook for GBP/USD is as uncertain as ever. We now know that the BoE has linked its interest rate outlook to employment, and this corresponds to Fed statements claiming that QE3 tapering is dependent upon labour market improvements.
There is an argument that the gains for the pound after Carney’s comments were premature, and should have been dependent next week’s employment data. The market didn’t seem to cut the US any slack when it came to the disappointing non-farm payroll figure. In fact, the doubt in the US labour market was reduced when the jobless claims figure was released yet it still hasn’t resulted in the USD gaining much ground. This makes us think the USD dollar has some catching up to do with respect to recent figures. While the likelihood of QE3 tapering is increasing in the US, the UK is rather highlighting its “highly stimulative stance”. If the market is looking for some indication of future QE prospects then the higher possibility of further stimulus in the UK should be something to worry about. This slight divergence in UK and US monetary policy should favour the USD in the months ahead.
Sasha Nugent,
Currency Analyst
Caxton FX
The release of UK Services PMI data shocked the market by exceeding expectations at 60.2 from 56.9 previously. Furthermore, industrial and manufacturing data were also positive with 1.1%m/m and 1.9%m/m growth respectively. Despite all of this good news, GBP has struggled to strengthen against its major counterparts.
The market had been anticipating the BoE inflation Report outlining forward guidance on the direction of interest rates. The release of the report as well as BoE Governor Mark Carney’s comments was broadly in line with expectations, with the MPC accepting that the UK recovery is underway but confirming market concerns that the recovery is still weak by historical standards. Most importantly, Carney expressed that the MPC intends to “maintain the current highly stimulative stance of monetary policy” until employment data improves, similar to forward guidance provided by the Fed. So low rates are here to stay for a long time to come, but we knew this.
On the release of the report and the accompanying statement last week, the pound initially weakened, but soon rebounded sharply against the USD closing at 1.5489 from opening at 1.5349 on Wednesday. It seems like this was exactly what the market was waiting for to provide the GBP with that extra strength it deserved after recent positive economic signals. The release of some strong UK trade data presented the opportunity for the pound to post its biggest weekly gain in a month as the trade deficit narrowed.
The dollar started August on the back foot thanks to a disappointing non-farm payroll figure but figures since then have been rather more encouraging. ISM manufacturing data exceeded expectations at 56.0 and the trade balance figures were positive with the trade deficit narrowing to $34.2bn, supporting US GDP growth. This set of releases definitely provides evidence that the US economy is in recovery mode; however the lack of detail on the timing of possible QE3 tapering is putting pressure on the USD.
The market continues to wait for an indication of when QE3 tapering will take place and comments from Fed officials point to the need for better employment figures. Last week, the release of unemployment claims was positive, with the average number of jobless claims declining to 335,500(the lowest figure since 2007), thus providing another boost to the view of the US recovery. This has gone some way to reduce concerns after the July non-farm figure.
Bearing in mind both the UK and US have been releasing positive data, the outlook for GBP/USD is as uncertain as ever. We now know that the BoE has linked its interest rate outlook to employment, and this corresponds to Fed statements claiming that QE3 tapering is dependent upon labour market improvements.
There is an argument that the gains for the pound after Carney’s comments were premature, and should have been dependent next week’s employment data. The market didn’t seem to cut the US any slack when it came to the disappointing non-farm payroll figure. In fact, the doubt in the US labour market was reduced when the jobless claims figure was released yet it still hasn’t resulted in the USD gaining much ground. This makes us think the USD dollar has some catching up to do with respect to recent figures. While the likelihood of QE3 tapering is increasing in the US, the UK is rather highlighting its “highly stimulative stance”. If the market is looking for some indication of future QE prospects then the higher possibility of further stimulus in the UK should be something to worry about. This slight divergence in UK and US monetary policy should favour the USD in the months ahead.
Sasha Nugent,
Currency Analyst
Caxton FX
Friday, 5 July 2013
July 2013 Monthly Report: Mark Carney makes an instant impression
In his recent Government Spending Review, Chancellor George Osborne described the UK economy as making the transition from “rescue to recovery.” UK economic data over the past month has certainly been very supportive of this proposition, building on signs of a robust start to Q2. The June PMI figures were very robust indeed and July’s followed suit, with the UK services sector gauge surging to a two-year high. This has bolstered our confidence that we will see GBP/EUR higher later this year but it is quite clear from the recent Monetary Policy Committee statement that the BoE’s will take a little more convincing as to the strength of the recovery. This is the major factor weighing on sterling’s upside potential at present.
As far as the eurozone is concerned, there have been some bright spots economically. Survey data in recent weeks has pointed to the start of a recovery. The eurozone economy is still contracting and there is still not much to cheer about at this stage but the pace of contraction is slowing and hopes of a recovery in the second half of 2013 are now very realistic. However, economic improvements have been offset by the re-emergence of debt crisis fault lines. Greece is back in the headlines for all the wrong reasons, while the political situation in Portugal in particular has pushed up bond yields and highlighted the euro’s ongoing vulnerability to political instability.
The dollar has endured a rocky time of it in recent weeks but the clarification that Ben Bernanke gave at the last US Federal Reserve meeting looks to have been a key moment. For a long time now the market has been second-guessing the Fed’s position on tapering its QE3 programme and on June 19, Bernanke communicated in no uncertain terms that they are on course to begin tapering later this year. Underpinning all of this, US data was broadly encouraging through June and things have started well this month with an excellent monthly employment update. Accordingly, we remain comfortable with our bullish USD position.
GBP/EUR
Downside risks prominent in light of BoE concerns
UK growth data remains on an uptrend but we, like many others, have been continuously frustrated to see the pound underperform its economic fundamentals on the exchange rates. This is particularly the case with respect to the euro.
Taking a look at UK conditions then, we have seen improvements in almost all areas of the economy. Judging by the monthly PMI surveys, the UK manufacturing and construction sectors have recovered by spending the past two months in expansion territory, while the dominant UK services sector continues to kick on impressively. UK services sector growth actually hit more than a two-year high in June.
Confidence in the private sector really is picking up and there are other areas to be cheery about too. Data revealed that UK retail sales for May surged by 2.1%, while we saw yet more improvement within the UK labour market. Meanwhile, the latest Bank of England credit report pointed to improvements in lending in Q2 to both individuals and corporate entities.
What has been slightly more disappointing on the growth front has been the news that on an annual basis, GDP has been downgraded from 0.6% to 0.3%. Nonetheless, Q1’s 0.3% GDP figure was confirmed and looking at the present and future (which is far more relevant than what went on last year), activity is looking up. Glancing ahead to the July 25 preliminary Q2 UK GDP figure, we are expecting at least a 0.5% showing, with a considerable chance of an overshoot. Given the sort of GDP figures coming out of the eurozone, we feel justified with our calls for a higher GBP/EUR rate, though we will seemingly have to be very patient.
So what is the Bank of England’s take on UK conditions? Carney didn’t take long to cause a stir, getting started by releasing a statement which managed market expectations surrounding monetary policy. Carney has told us that interest rates will remain lower for longer (probably unchanged at record lows into 2016) and the market has interpreted an increased chance of further quantitative easing down the line. The MPC statement was also distinctly cautious despite the upturn in recent UK growth data, reminding us that growth “remains weak by historical standards.” An MPC statement in itself is actually very unusual; the last one was released in March 2009, so the market is clearly concerned that Carney is planning an aggressive shake-up on the monetary policy front. Based on a steadily improving economic performance and brightened outlook, we feel that the Bank of England will not elect to top up its asset purchase facility (quantitative easing) next month but we cannot rule it out later this year given Mark Carney’s aggressive entrance. Concerns in this regard will weigh on GBP.
Euro typically robust despite political concerns
While the UK recovery makes strides, the eurozone recession also appears to be stabilising. Looking at the eurozone PMI figures as a whole, a 15-month high was hit. This is encouraging stuff, though the PMI gauges do still remain in contraction territory. With this in mind, we do not expect the European Central Bank to cut interest rates again soon, particularly in light of the recent upturn in eurozone price pressures. Draghi did however remind us in his recent press conference that another rate cut is still very much on the table. In terms of other monetary policy measures, talk of negative deposit rates is probably aimed at easing the pressures being felt in the peripheral bond markets. Again, we would be surprised to see them implemented soon.
Events in Greece are definitely ramping up debt crisis nerves – the last thing the market wants to see is a return to the brink for that troubled country. Greece is currently grappling with officials over the release of the next €8.1bn bailout tranche, regarding which eurozone finance ministers will be meeting on Monday July 8.
Greece needs to show that it has made sufficient progress on reforming it public sector and it looks as though a deal will be struck with IMF to avoid the body withdrawing its support for the bailout plan. There is real sense that Greece is not doing enough and developments could well weigh on the euro in the short-term.
Portugal is the other dominant concern as far as the euro is concerned at present; the political situation there has been in turmoil after the recent resignation of the finance minister, followed by the leader of the junior coalition partner/foreign minister. Despite recent news that a deal has been struck to keep the governing coalition intact, there remains a risk that the government could fall apart and early elections be called, which would raise uncertainties surrounding Portugal’s commitments to its bailout plans. The political climate is likely to remain highly fragile in the weeks and months ahead. So long as unemployment soars, political risks are likely to be the centrepiece of the debt crisis moving forward, throughout the eurozone.
After this week’s major GBP/EUR downswing, which saw fresh 3 ½ month lows posted below €1.16, we can no longer ignore the downside risks that this pair is likely to face over the coming weeks. We certainly don’t believe the fundamentals justify this sort of GBP/EUR weakness but momentum counts for quite a lot in FX. We do see this pair recovering later on in the year but for now, levels below €1.16 look set to dominate.
GBP/USD
Confirmation of QE3 tapering frees up dollar rally
GBP/USD’s rise in June up to four-month highs in the $1.5750 area was, at least in part, a fair reflection of this improved UK growth performance and brighter outlook (though it would more accurately be attributed to doubts over QE3 tapering). However, the rate has fallen every bit as far and fast as it climbed and we don’t expect to see those levels again given the intentions stated by the Fed last month.
There is no shortage of dovish dissent from within the US Federal Reserve but Chairman Ben Bernanke has clearly been sufficiently encouraged by US growth data to communicate to the market that an exit plan for QE3 is loosely in place and that they are on schedule to taper it off in H2 of this year. This did not come as a surprise to us but the verbalisation of these intentions from the man himself appears to have been a seminal moment. Stocks, commodities and other riskier assets suffered and funds came flooding back in the greenback.
We retain a broadly positive outlook for the US economy across the second half of the year. The eurozone recession does appear to be stabilising now and is likely continue to do so but improvements will be very slow indeed and the bloc is streets behind its US counterpart, which supports are calls for a lower EUR/USD pair. EUR/USD is still a fair way off its year-to-date lows of $1.2745 and we fully expect this to be targeted in the weeks ahead. GBP/USD will be hard-pushed to post anything but further losses below $1.50 if this scenario plays out.
A stronger US economy, as shown by the recent strong US non-farm payroll figure, should result in the Fed tapering QE3 and in doing so support the dollar in the coming months. We do feel the lingering concerns over further BoE QE are slightly overstated but this is unlikely to be sufficient for sterling to avoid another decline vis-a-vis the dollar.
On top of monetary policy and growth drivers, we are seeing a considerable slowdown in Chinese growth, which as well as weighing on commodity prices and confidence in the global recovery, is seeing cash flood out of the emerging markets. This again is a safe-haven, dollar-positive theme.
Exchanging currency
With some crucial support levels having been taken out, GBP/USD looks set to head even lower. Targets towards $1.40 by the end of the year remain very realistic.
GBP/EUR: €1.1550
GBP/USD: $1.47
EUR/USD: $1.2725
Richard Driver
Foreign Exchange Analyst
Caxton FX
As far as the eurozone is concerned, there have been some bright spots economically. Survey data in recent weeks has pointed to the start of a recovery. The eurozone economy is still contracting and there is still not much to cheer about at this stage but the pace of contraction is slowing and hopes of a recovery in the second half of 2013 are now very realistic. However, economic improvements have been offset by the re-emergence of debt crisis fault lines. Greece is back in the headlines for all the wrong reasons, while the political situation in Portugal in particular has pushed up bond yields and highlighted the euro’s ongoing vulnerability to political instability.
The dollar has endured a rocky time of it in recent weeks but the clarification that Ben Bernanke gave at the last US Federal Reserve meeting looks to have been a key moment. For a long time now the market has been second-guessing the Fed’s position on tapering its QE3 programme and on June 19, Bernanke communicated in no uncertain terms that they are on course to begin tapering later this year. Underpinning all of this, US data was broadly encouraging through June and things have started well this month with an excellent monthly employment update. Accordingly, we remain comfortable with our bullish USD position.
GBP/EUR
Downside risks prominent in light of BoE concerns
UK growth data remains on an uptrend but we, like many others, have been continuously frustrated to see the pound underperform its economic fundamentals on the exchange rates. This is particularly the case with respect to the euro.
Taking a look at UK conditions then, we have seen improvements in almost all areas of the economy. Judging by the monthly PMI surveys, the UK manufacturing and construction sectors have recovered by spending the past two months in expansion territory, while the dominant UK services sector continues to kick on impressively. UK services sector growth actually hit more than a two-year high in June.
Confidence in the private sector really is picking up and there are other areas to be cheery about too. Data revealed that UK retail sales for May surged by 2.1%, while we saw yet more improvement within the UK labour market. Meanwhile, the latest Bank of England credit report pointed to improvements in lending in Q2 to both individuals and corporate entities.
What has been slightly more disappointing on the growth front has been the news that on an annual basis, GDP has been downgraded from 0.6% to 0.3%. Nonetheless, Q1’s 0.3% GDP figure was confirmed and looking at the present and future (which is far more relevant than what went on last year), activity is looking up. Glancing ahead to the July 25 preliminary Q2 UK GDP figure, we are expecting at least a 0.5% showing, with a considerable chance of an overshoot. Given the sort of GDP figures coming out of the eurozone, we feel justified with our calls for a higher GBP/EUR rate, though we will seemingly have to be very patient.
So what is the Bank of England’s take on UK conditions? Carney didn’t take long to cause a stir, getting started by releasing a statement which managed market expectations surrounding monetary policy. Carney has told us that interest rates will remain lower for longer (probably unchanged at record lows into 2016) and the market has interpreted an increased chance of further quantitative easing down the line. The MPC statement was also distinctly cautious despite the upturn in recent UK growth data, reminding us that growth “remains weak by historical standards.” An MPC statement in itself is actually very unusual; the last one was released in March 2009, so the market is clearly concerned that Carney is planning an aggressive shake-up on the monetary policy front. Based on a steadily improving economic performance and brightened outlook, we feel that the Bank of England will not elect to top up its asset purchase facility (quantitative easing) next month but we cannot rule it out later this year given Mark Carney’s aggressive entrance. Concerns in this regard will weigh on GBP.
Euro typically robust despite political concerns
While the UK recovery makes strides, the eurozone recession also appears to be stabilising. Looking at the eurozone PMI figures as a whole, a 15-month high was hit. This is encouraging stuff, though the PMI gauges do still remain in contraction territory. With this in mind, we do not expect the European Central Bank to cut interest rates again soon, particularly in light of the recent upturn in eurozone price pressures. Draghi did however remind us in his recent press conference that another rate cut is still very much on the table. In terms of other monetary policy measures, talk of negative deposit rates is probably aimed at easing the pressures being felt in the peripheral bond markets. Again, we would be surprised to see them implemented soon.
Events in Greece are definitely ramping up debt crisis nerves – the last thing the market wants to see is a return to the brink for that troubled country. Greece is currently grappling with officials over the release of the next €8.1bn bailout tranche, regarding which eurozone finance ministers will be meeting on Monday July 8.
Greece needs to show that it has made sufficient progress on reforming it public sector and it looks as though a deal will be struck with IMF to avoid the body withdrawing its support for the bailout plan. There is real sense that Greece is not doing enough and developments could well weigh on the euro in the short-term.
Portugal is the other dominant concern as far as the euro is concerned at present; the political situation there has been in turmoil after the recent resignation of the finance minister, followed by the leader of the junior coalition partner/foreign minister. Despite recent news that a deal has been struck to keep the governing coalition intact, there remains a risk that the government could fall apart and early elections be called, which would raise uncertainties surrounding Portugal’s commitments to its bailout plans. The political climate is likely to remain highly fragile in the weeks and months ahead. So long as unemployment soars, political risks are likely to be the centrepiece of the debt crisis moving forward, throughout the eurozone.
After this week’s major GBP/EUR downswing, which saw fresh 3 ½ month lows posted below €1.16, we can no longer ignore the downside risks that this pair is likely to face over the coming weeks. We certainly don’t believe the fundamentals justify this sort of GBP/EUR weakness but momentum counts for quite a lot in FX. We do see this pair recovering later on in the year but for now, levels below €1.16 look set to dominate.
GBP/USD
Confirmation of QE3 tapering frees up dollar rally
GBP/USD’s rise in June up to four-month highs in the $1.5750 area was, at least in part, a fair reflection of this improved UK growth performance and brighter outlook (though it would more accurately be attributed to doubts over QE3 tapering). However, the rate has fallen every bit as far and fast as it climbed and we don’t expect to see those levels again given the intentions stated by the Fed last month.
There is no shortage of dovish dissent from within the US Federal Reserve but Chairman Ben Bernanke has clearly been sufficiently encouraged by US growth data to communicate to the market that an exit plan for QE3 is loosely in place and that they are on schedule to taper it off in H2 of this year. This did not come as a surprise to us but the verbalisation of these intentions from the man himself appears to have been a seminal moment. Stocks, commodities and other riskier assets suffered and funds came flooding back in the greenback.
We retain a broadly positive outlook for the US economy across the second half of the year. The eurozone recession does appear to be stabilising now and is likely continue to do so but improvements will be very slow indeed and the bloc is streets behind its US counterpart, which supports are calls for a lower EUR/USD pair. EUR/USD is still a fair way off its year-to-date lows of $1.2745 and we fully expect this to be targeted in the weeks ahead. GBP/USD will be hard-pushed to post anything but further losses below $1.50 if this scenario plays out.
A stronger US economy, as shown by the recent strong US non-farm payroll figure, should result in the Fed tapering QE3 and in doing so support the dollar in the coming months. We do feel the lingering concerns over further BoE QE are slightly overstated but this is unlikely to be sufficient for sterling to avoid another decline vis-a-vis the dollar.
On top of monetary policy and growth drivers, we are seeing a considerable slowdown in Chinese growth, which as well as weighing on commodity prices and confidence in the global recovery, is seeing cash flood out of the emerging markets. This again is a safe-haven, dollar-positive theme.
Exchanging currency
With some crucial support levels having been taken out, GBP/USD looks set to head even lower. Targets towards $1.40 by the end of the year remain very realistic.
GBP/EUR: €1.1550
GBP/USD: $1.47
EUR/USD: $1.2725
Richard Driver
Foreign Exchange Analyst
Caxton FX
- This post has been prepared by Caxton FX Ltd for information purposes only
- If you would like more information or would like to make a money transfer, get in touch info@caxtonfx.com.
Friday, 7 June 2013
June Currency Report
UK outlook improves but sterling still can’t fully capitalise
Whilst sterling has enjoyed itself against commodity currencies like the AUD, NZD and ZAR, it has come under periods of real pressure against majors like the euro and the US dollar. Sterling’s poor performance has not been fully justified in fundamental economic terms, though we can understand why the market’s faith has been dented a little. The market may have been overexcited by the UK economy’s performance in the first quarter (+0.3% GDP) and we have been dealt a few reality checks of late in terms of economic figures. Amid a sharp decline in UK inflation and a lack of change in the MPC voting pattern on QE, sterling has been slapped with fresh waves of speculation that the Bank of England will do further quantitative easing in the months ahead. With Sir Mervyn King heading towards the exit door in the next few weeks, a change to the man at the head of the Bank of England also complicates matters for sterling significantly.
As far as the US dollar is concerned, shifts in speculation as to the US Federal Reserve’s QE3 programme continue to dominate price movement. There really is no other issue that reverberates throughout the financial markets like the QE3 issue and the FX markets are certainly no exception. US economic developments and comments from Fed speakers have ratcheted up the speculation, though there was more than a hint of over-hype about market fears in May of an imminent exit of QE3. The dollar-weakness we have seen in the past few sessions may be a reflection of a market coming to its senses.
Eurozone data showed some brighter spots in May. Q1 GDP figures may have come in significantly softer than expected but Germany is seemingly shaking off some early-year weakness and looks to be stepping up output at the start of Q2. Spain is also stabilising. Tensions with respect to the debt crisis remain remarkably subdued and economic data has taken on the main significance. The euro was unperturbed by the ECB’s decision to cut interest rates and we have even seen a welcome shift in focus from the European Commission towards growth promotion and easing-up on austerity demands. We remain bearish on the euro on a medium and long-term view, but June could be a strong month for the single currency.
GBP/EUR
UK growth kicks on
Sterling has been underperforming for a fortnight now, erasing gains made at the start of the month as a result of some positive Q1 and early-Q2 UK growth figures. April’s manufacturing, construction and services PMI figures all came in above expectation, with the latter showing some particularly encouraging growth. The same has been true of May PMI figures, with the UK services sector coming in at a 14-month high. Provided momentum is carried into June, a Q2 GDP figure of 0.5% is very much on the cards.
Along with some more solid UK unemployment data, the UK outlook really has improved. This hasn’t been lost on Mervyn King and the BoE, the May Quarterly Inflation Report was noticeably upbeat about the UK recovery and Q2 growth in particular. Regardless, sterling’s post-GDP honeymoon was short-lived. But why?
It has by no means been all good news from the UK economy. The latest public borrowing update disappointed, as did the trade balance. The most concerning area has doubtless been the high street. Retail sales data confirmed that April was another shocking month for spending on the high street, with households continuously constrained by alarmingly weak wage growth.
The Carney Factor remains a concern
Another key point of weakness for sterling has been in the area of QE speculation. UK inflation dipped to a seven-month low of 2.4% in May and whilst this remains above the official target, this certainly gives the BoE much greater scope to ease monetary policy via QE. There were plenty of raised eyebrows (us included) with respect to the fact that the minutes for the MPC’s May meeting revealed that despite the brighter UK outlook, three members continued to vote in favour of more QE. We thought the increasingly bullish sounding Mervyn King would at least have changed his vote.
Some softer UK growth figures and the sharp dip in UK inflation would have left sterling vulnerable to more QE regardless but the fact that the market is staring down the barrel of a new BoE Governor has only intensified QE speculation. Mark Carney takes over from Sir Mervyn King in July and some commentators are expecting a monetary policy shake-up, which may or may not involve more QE. There is plenty of scope for more QE if he chooses to make an early impression and this uncertainty has been a major driver of sterling’s underperformance lately and will continue to weigh over the next few weeks.
Green shoots of recovery in the eurozone?
Similar to the UK economy, there has been room for a little optimism with respect to the eurozone. The key development has been the recent upturn in German manufacturing and industrial production data. However, there have been other good news areas; the PMI updates out of Spain and Italy have beaten expectations and there have been some significant improvements in the Spanish labour market over the past couple of months. There is an extremely long way to go and this could well prove premature but some indications have emerged that the eurozone recession is beginning to stabilise.
The ECB cut interest rates last month to a fresh record low of 0.50% and in the subsequent press conference, ECB President Draghi assured the market that he “stands ready to act” if conditions warrant it, be that in the form of another interest rate cut or a move towards negative deposit rates. The growth figures that have emerged since that comment suggest the need to act has receded. One of the key motivations for the rate cut in May was concerns that economic weakness in the eurozone periphery was spreading to the core (Germany), a theme which looks to have abated for the time being. Accordingly, we expect Draghi to focus on boosting SME loans at the monthly meeting this Thursday (June 6), rather than cutting rates.
There is room for further euro optimism this month. On June 11-12, there appears to be a strong chance (according to analysis among the legal profession) that the German Constitutional Court will refer the case of German participation in bailout schemes to the European Court of Justice. Draghi’s bond-buying plan is part of this and it has been crucial in underpinning confidence in the survival of the euro. Referral of the case to the ECJ would appear to be a far safer option in terms of having objections to the bond-buying plan thrown out. This should help to continue keeping the lid on peripheral bond yields for the foreseeable.
We see the euro as pretty overvalued at present. Even when eurozone data outperforms expectations, UK data is still streaks ahead in general. As the UK recovery takes shape, this should be reflected in higher GBP/EUR levels in the second half of the year. However, the softer tone of the USD, the cautious optimism surround the eurozone recovery, and the concerns over BoE monetary policy could be enough to keep GBP/EUR pinned down in the weeks ahead. A dip back down to €1.1630 is perfectly plausible but losses beyond this level should be contained. Broadly speaking, we are looking for more sideways trading in this pair in June, in and around the €1.17-1.18 area.
GBP/USD
Market on red alert vis-a-vis QE3
The USD was rampant for much of May, helped by improvements in US data which have fanned the debate surrounding tapering off QE3. While the US Federal Reserve said in May that it was willing to increase QE3 if needs be, we still think its next move will be to taper things off. So too do most other market players, not least due to an upturn in some key US figures in recent weeks. The latest monthly jobs report was encouraging and improvements in consumer sentiment were particularly impressive. We are expecting another monthly jobs report this Friday (June7). The result has been some increasingly hawkish language from members of the US Federal Reserve.
Still, there remains plenty of reason for caution from Fed doves like Bernanke. This week’s US manufacturing PMI update was the weakest in almost four years and such figures give the Fed ample justification for continuing with QE3 for at least the next few months. US inflation remains very subdued as well, which isn’t conducive to QE3 tapering in the near-term. Expectations of imminent QE3 tapering have been pared back over the past week or so and it’s certainly true that the Fed will be in no hurry. We do think that the move will come about around September/October time.
This should ensure a strong conclusion to 2013 for the USD. US data, while patchy, continues to outperform indicators from the eurozone and the UK on the whole. We see significantly greater risks of another monetary easing move from the ECB and the BoE than we do from the Fed.
A little more room overhead before another downturn
Sterling has benefited from decent support at the $1.50 level and there is some scope for further upward momentum. The recent UK services PMI figure (June 5) has brightened the UK outlook further and a strong EUR/USD pair above $1.30 is also lending plenty of support. A rise to the $1.55 area is feasible in the near-term. However, nerves over QE from incoming BoE Governor Carney will likely dampen any bounce back up close towards the $1.60 level. We remain content with the analysis that this latest bout of USD-weakness is a short-term correction rather than the start of a GBP/USD recovery. The trends in respective economic data and central bank rhetoric from the US and the UK support a GBP/USD move lower in the longer-term. In the meantime, a move to $1.55 is feasible before fresh selling pressure mounts.
Richard Driver
Foreign Exchange Analyst
Caxton FX
- This post has been prepared by Caxton FX Ltd for information purposes only
- If you would like more information or would like to make a money transfer, get in touch info@caxtonfx.com.
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