Sasha Nugent
Currency Analyst
Wednesday, 9 October 2013
A step into reality
Last week we witnessed a sterling sell off as investors began to pare back expectations of a rate hike earlier than the BoE outlined in forward guidance. Investors came to the reality that although the UK recovery is gaining momentum, there is definitely a long way to go and the road to recovery is going to be a bumpy one. UK manufacturing production figures released this morning showed a 1.2% decline, a figure which was a complete surprise to the market, triggering another sterling sell off. This is unlikely to alter the overall view on the UK economy but will rather inject a burst of practicality into the markets. It was almost impossible for UK data to continue to provide upside surprise and it was only a matter of time before the market adjusted.
Monday, 7 October 2013
Caxton FX Weekly Report: Investors unwind sterling long positions
Investors profit-take as rate hike speculation eases
Sterling ended the week experiencing sharp declines as investors realise they may have gotten ahead of themselves on UK optimism. Bank of England Governor Mark Carney stated that the central bank will not consider “raising rates or tightening monetary policy until we see the conditions in the economy where the economy is really growing”. This, alongside economic figures that have come in below expectations, have highlighted the fact the UK still has a long way to go before the economy is perceived as “really growing”. The Bank of England is likely to maintain their dovish bias when they meet to discuss monetary policy this week, and we expect both the base rate and asset purchase programme to remain on hold for another month. After weeks of being the frontrunner sterling begins the week in a more vulnerable position and we doubt much is going to boost the GBP/EUR and GBP/USD rate back to the highs we have seen recently. Manufacturing Production figures could provide sterling with some support, however with a more euro-focused week sterling gains will be limited for a while yet.
Stellar performance from the euro, but can it continue?
The euro definitely made a strong comeback towards the end of last week, and with a more euro-focused week the single currency could possibly extend these gains further. Sentiment has improved towards the eurozone after Italian Prime Minister Letta won the confidence vote and ECB President Draghi stressed the bank’s commitment to use all policy tools available if the recovery falters. The central bank didn’t signal any concern about the current strength of the euro but did emphasize the exchange rate’s significance to the recovery of the euro area. President Draghi is due to speak on Wednesday and Thursday and it is unlikely that rhetoric will differ much from what we heard last week. German factory orders, industrial production figures and German trade balance will all be numbers to watch, and considering the ECB doesn’t view a strong euro as a threat just yet, we doubt investors will hesitate if data provides upside surprise.
How close will we get to a US default?
The dollar has suffered the consequences of a US government clash, and it will most likely get worse before it gets better for the currency. Last week we witnessed some good US economic figures provide the currency with some relief, but with the shutdown preventing the all-important US jobs release, there is only so much US data can do. The FOMC meeting minutes on Thursday will be of some interest, however with Fed tapering talk on hold for now it is unlikely to have a big influence with the partial shutdown still in place. Last week’s unemployment claims provided upside surprise and if this week follows suit it could support dollar weakness in the short term. For now the market is just playing the waiting game, and investors are not yet convinced the US government will risk a US default. As the days left to reach a decision diminish and risk aversion increases, we may see the dollar return as the safe haven once again. We believe the dollar could remain on the back foot for most of the week and don’t expect to see the risk aversion play for a few sessions yet.
End of week forecast
GBP / EUR
|
1.1850
|
GBP / USD
|
1.61
|
EUR / USD
|
1.3610
|
GBP / AUD
|
1.71
|
Sasha Nugent
Currency Analyst
Tuesday, 1 October 2013
October 2013 Monthly report: The UK, US and Eurozone are all on data watch
UK data releases have continued to provide upside surprise for the majority of September, keeping sterling on the front foot against the euro and US dollar. Sentiment has also improved, however the better sterling does, the more of a problem it causes for Carney. The big question is whether sterling can remain robust through this month also, or if this is too much to ask for.
Eurozone figures have been a bit more disappointing this month, and sterling has taken advantage of this, strengthening gradually as September progressed. Flash PMI data didn’t do the euro any favours either with manufacturing figures disappointing while the services figures have improved. The third consecutive win for German Chancellor Angela Merkel ensured policy consistency ultimately, benefitting the euro, although economic data must improve for the single currency to remain competitive.
September ended badly for the dollar and this month it all begins again. The Federal Reserve kept their asset purchase programme on hold for yet another month which weakened the dollar and sparked uncertainty about the strength of the US economy. Failure from the government to come to an agreement about the debt ceiling has also hurt greenback and the currency will be under huge pressure this month. Eyes will be glued on the US economic figures, although a partial shutdown may prevent important numbers such as non-farm employment data to be released. Provided US government can come to an agreement in time, and economic figures meet expectations, we may see taper talk brewing once again.
September ended badly for the dollar and this month it all begins again. The Federal Reserve kept their asset purchase programme on hold for yet another month which weakened the dollar and sparked uncertainty about the strength of the US economy. Failure from the government to come to an agreement about the debt ceiling has also hurt greenback and the currency will be under huge pressure this month. Eyes will be glued on the US economic figures, although a partial shutdown may prevent important numbers such as non-farm employment data to be released. Provided US government can come to an agreement in time, and economic figures meet expectations, we may see taper talk brewing once again.
The standard the UK has set for itself over the past month has been a relatively high one, with economic figures continuing to provide upside surprise and further suggest a robust UK recovery. The main question for the UK this month is whether this impressive stream of figures can continue. Last month we saw the unemployment rate unexpectedly fall to 7.7%, as well as the claimant count figure drop by 32.6k, a significant driver of sterling momentum. If UK figures broadly provide the upside surprise that we have seen of late, we could see sterling continue to dominate against some of its major currency partners.
The Bank of England will announce the official bank rate for October on Thursday 10th (12:00), and the markets will definitely be listening attentively to the accompanying statement (if provided). The Governor is likely to reiterate the central bank’s dovish stance, and attempt to enforce the bank’s commitment to maintaining low rates in order to support the UK recovery. What’s even more interesting is the fact that the better the UK economy does, the more pressure is applied on BoE Governor Mark Carney in relation to the forward guidance he announced a few months ago. Questions have been brewing about whether the central bank can actually keep rates at 0.50% with inflation already above the central bank target and increasing economic activity likely to increase price pressure. As long as this month’s figures outperform, the market will continue to question forward guidance so we could see sterling continue to gain gradually in October.
The Bank of England will announce the official bank rate for October on Thursday 10th (12:00), and the markets will definitely be listening attentively to the accompanying statement (if provided). The Governor is likely to reiterate the central bank’s dovish stance, and attempt to enforce the bank’s commitment to maintaining low rates in order to support the UK recovery. What’s even more interesting is the fact that the better the UK economy does, the more pressure is applied on BoE Governor Mark Carney in relation to the forward guidance he announced a few months ago. Questions have been brewing about whether the central bank can actually keep rates at 0.50% with inflation already above the central bank target and increasing economic activity likely to increase price pressure. As long as this month’s figures outperform, the market will continue to question forward guidance so we could see sterling continue to gain gradually in October.
GBP/EUR
Impressive European data has been lacking for the majority of the month, with the euro missing out on some good opportunities to strengthen against sterling. German IFO business climate figures came in below expectations and Flash Manufacturing and Services PMI showed some imbalances in the development of the euro-area. French, German and the Eurozone aggregate manufacturing figures all came in short of estimates while services figures surprised to the upside, suggesting an uneven recovery. The ECB President Mario Draghi has done little to bolster the currency as his most recent speeches have emphasized the ECB’s willingness to use any instrument necessary to defend its monetary stance. Draghi highlighted that the recovery is still fragile and therefore maintaining low rates was crucial to stabilizing the eurozone economies. The ECB seem adamant to enforce that they do not want money markets to become too enthusiastic about the progress of the eurozone and that the central bank still has tools to prevent rising borrowing costs. The market will be following this rhetoric throughout October and economic releases will also be eyeballed to see if it continues to point to an improving euro area. Italian political instability will also be a hot topic for the month as the former Prime Minister Berlusconi called for elections “as soon as possible”. This has caused uncertainty and risks euro momentum if investors become increasingly worried about politics in the region’s third biggest economy. A UK economy which is building up steam, and a US economy which is flooded with tapering speculation may cloud any developments in the eurozone and therefore limit euro gains. We have already seen this reflected though GBP/EUR highs of 1.1988 in September, levels not seen in over six months. We expect the euro to be on the sidelines against sterling this month, gaining a little momentum on the back of better data releases and positive news. If US figures show an improving economy, especially better employment figures then euro could be no match for the dollar either.
GBP/USD
The Fed talk rambles on
Last month we witnessed the dollar plummet as a result of the Fed holding stimulus constant for another month. After the announcement, various Fed members spoke and said that stronger economic signals were needed in order to warrant such an adjustment in Fed policy, in particular, more positive employment figures. Although the US unemployment rate is now down to 7.3% it was rather a result of lower labour participation than from more people finding jobs. US economic releases will be a focal point this month and as they improve, it is likely to spark tapering speculation once again, boosting dollar momentum. Non-farm employment figures and the unemployment rate due this week will be major drivers of dollar performance and could possibly set the tone for the rest of the month. Providing the possibility of a stimulus reduction remains on the table, even if it is a small taper, we should see the dollar begin to reverse losses seen last month.
However, October is also the deadline for the US government to come to a conclusion about the debt ceiling, and with the government already in partial shutdown, the release of fundamental figures such as US employment data could be hindered. With the market seeking this information in order to gauge the Federal Reserve’s next policy move the dollar will remain vulnerable at least until this is solved. The uncertainty surrounding the issue has increased demand for safe haven currencies such as the swiss franc and the yen and for now has drawn the attention away from the tapering debate.
It will be a struggle for the dollar to rebound this month, as potential sterling gains and any upbeat figures from the eurozone will attempt to limit dollar strength. As long as the budget deal is reached in time, we maintain our view that greenback will push for a modest recovery in the weeks ahead.
GBP/EUR: 1.1950
GBP/USD: 1.6025
EURUSD: 1.3425
Monday, 30 September 2013
Caxton FX Weekly Report: PMI Galore
Can the UK do it again?
It all begins again for the UK. Can sterling continue to produce such impressive figures to kick start the month on a good note? This week will most likely set a good tone for the majority of the month with a number of economic figures due. The main focus will be on PMI figures, and after last month’s golden performance, investors will definitely be waiting to see if it was just a one off. Last week, BoE Governor Mark Carney displayed a more hawkish tone. Carney explained that although the central bank would consider further QE if the recovery falters, his personal view is the recovery is strengthening and therefore more QE isn’t needed just yet. This allowed the pound to dominate, however with various economic figures and speeches out of the eurozone and the US, sterling will be under pressure to keep both the GBP/EUR and GBP/USD rates under tight grip.
Euro aims to be seen
Dovish statements from ECB members weakened the euro towards the end of last week and this is likely to continue in the days ahead. The monthly ECB rate announcement is on Thursday and in the following ECB press conference, President Draghi is most likely to reiterate points he has made in earlier speeches. Considering recent eurozone performance, we do not expect the ECB to adjust their current interest rate. A slew of economic data will be published this week including Spanish and Italian manufacturing and services PMI figures. Unemployment data for Germany, Spain and the eurozone aggregate will also be released and will attract at lot of attention considering the regions struggle with unemployment. A surprise improvement in the labour market will definitely be welcomed by the market and if this occurs, we should see the euro gain. German and eurozone aggregate retail sales numbers are also due and the single currency is likely to remain vulnerable against sterling if UK PMI data exceeds expectations. If the US government can come to a solution for its fiscal problems in time, it would also be big week for the dollar, where positive US employment figures could overshadow improvements in the euro area. Although UK and US developments could cloud euro strength, we believe that the euro will be able to pare back some of its losses during the course of the week.
Non-farm payrolls and Bernanke to direct dollar movement
Recently US economic figures have been missing expectations, and this has caused the dollar to remain weak against both the euro and sterling. The GBPUSD rate revisited levels of 1.61 on Friday, while the EURUSD rate sat comfortably above 1.35. The September 18th Fed meeting which saw the asset purchase programme remain on hold, triggered a downward spiral for the dollar, and this week, greenback will aim to start the month more positively. Provided the US government can come to an agreement regarding fiscal policy, non-farm payrolls and the employment rate are significant data releases which are most likely to set the tone for the month. ISM manufacturing and non-manufacturing figures will also be major drivers of the dollar this week. Fed chairman Ben Bernanke is due to make a speech on Wednesday evening and investors will be eager to hear from the horse’s mouth what is required in order to give tapering the go ahead. Comments made in this speech are likely to dominate dollar momentum at least until non-farm employment data and the unemployment rate are released. This will be a make or break week for greenback, and as much as the dollar could strengthen this week, failure to produce decent results could see it weaken. We maintain our view that the dollar will make another attempt to reduce recent losses yet we expect to see volatility as the week end approaches.
End of week forecast
GBP / EUR
|
1.1970
|
GBP / USD
|
1.6050
|
EUR / USD
|
1.3475
|
GBP / AUD
|
1.74
|
Sasha Nugent
Currency Analyst
Caxton FX
Monday, 23 September 2013
Caxton FX Weekly Report: US dollar attempts to recover
Sterling aims to hold on tight
Last week’s main market driver was the decision by the Federal Reserve to keep the asset purchase program unchanged for at least another month. The shocking decision allowed sterling to run away with the trophy, and it is with that trophy that sterling begins the week. With fewer UK releases, the pound could come under pressure after recent strength. Current account figures due on Thursday (09:30) will be the main release, although CBI realised sales on Wednesday (11.00) and the Final GDP q/q reading on Thursday (09:30) could possibly provide sterling with more support. Despite poor retail sales figures, the pound has remained resilient hanging on to some good levels against both the euro and the dollar. Some MPC members are due to speak and it will definitely be interesting what they have to say about the UK economy. The PMI figures for France, Germany and the Eurozone aggregate number provided mixed results keeping sterling in charge, however good German IFO business climate numbers could attempt to push the GBP/EUR rate lower. The GBP/USD rate could also adjust downwards provided US data releases provide upside surprise.
The euro’s chance to surprise markets
Angela Merkel managed to secure her position as the German Chancellor for her third consecutive term, a historic victory. Eurozone PMI figures showed uneven development with manufacturing sectors coming in below expectations, while the services sector figures beat estimates, dampening euro momentum. These figures highlight uneven progress in the eurozone economies. German IFO data tomorrow provides another opportunity for the euro to gain. ECB President Mario Draghi is due to make a speech on this afternoon and on Friday, which will most likely have an effect on the euro, possibly providing more insight on his perspective on the Eurozone economies. Although we expect the ECB President to display some positive light on the development of the euro area, Draghi may also remind the markets that the recovery is still extremely vulnerable limiting euro upside. We could potentially see a slight reversal in the EUR/USD rate this week, however this is dependent on the performance of US indicators.
A fresh start for greenback
This week the dollar has a chance to put its nightmares of last week behind. A slew of US data releases are due which could allow the dollar to pare back some of its losses against euro and sterling. Many Fed members are due to speak this week and hopefully this will help shed some light on the central bank’s thinking behind last week’s decision to hold QE3 constant. Fed member of St Louis James Bullard has already made a statement claiming that small tapering of quantitative easing is possible next month. After the cloud the Fed pulled over the US recovery last week, this week should see evidence begin to build once again in order to warrant tapering to begin in October. Upside surprise from CB consumer confidence figures as well as strong core durable goods orders and new homes sales, would contribute to putting the dollar on the right path to rebuilding earlier strength. We expect to see the GBP/USD and EUR/USD rate retract a marginally as the week progresses.
Sasha Nugent
Last week’s main market driver was the decision by the Federal Reserve to keep the asset purchase program unchanged for at least another month. The shocking decision allowed sterling to run away with the trophy, and it is with that trophy that sterling begins the week. With fewer UK releases, the pound could come under pressure after recent strength. Current account figures due on Thursday (09:30) will be the main release, although CBI realised sales on Wednesday (11.00) and the Final GDP q/q reading on Thursday (09:30) could possibly provide sterling with more support. Despite poor retail sales figures, the pound has remained resilient hanging on to some good levels against both the euro and the dollar. Some MPC members are due to speak and it will definitely be interesting what they have to say about the UK economy. The PMI figures for France, Germany and the Eurozone aggregate number provided mixed results keeping sterling in charge, however good German IFO business climate numbers could attempt to push the GBP/EUR rate lower. The GBP/USD rate could also adjust downwards provided US data releases provide upside surprise.
The euro’s chance to surprise markets
Angela Merkel managed to secure her position as the German Chancellor for her third consecutive term, a historic victory. Eurozone PMI figures showed uneven development with manufacturing sectors coming in below expectations, while the services sector figures beat estimates, dampening euro momentum. These figures highlight uneven progress in the eurozone economies. German IFO data tomorrow provides another opportunity for the euro to gain. ECB President Mario Draghi is due to make a speech on this afternoon and on Friday, which will most likely have an effect on the euro, possibly providing more insight on his perspective on the Eurozone economies. Although we expect the ECB President to display some positive light on the development of the euro area, Draghi may also remind the markets that the recovery is still extremely vulnerable limiting euro upside. We could potentially see a slight reversal in the EUR/USD rate this week, however this is dependent on the performance of US indicators.
A fresh start for greenback
This week the dollar has a chance to put its nightmares of last week behind. A slew of US data releases are due which could allow the dollar to pare back some of its losses against euro and sterling. Many Fed members are due to speak this week and hopefully this will help shed some light on the central bank’s thinking behind last week’s decision to hold QE3 constant. Fed member of St Louis James Bullard has already made a statement claiming that small tapering of quantitative easing is possible next month. After the cloud the Fed pulled over the US recovery last week, this week should see evidence begin to build once again in order to warrant tapering to begin in October. Upside surprise from CB consumer confidence figures as well as strong core durable goods orders and new homes sales, would contribute to putting the dollar on the right path to rebuilding earlier strength. We expect to see the GBP/USD and EUR/USD rate retract a marginally as the week progresses.
End of week forecast
GBP / EUR
|
1.1830
|
GBP / USD
|
1.5970
|
EUR / USD
|
1.3480
|
GBP / AUD
|
1.7050
|
Sasha Nugent
Currency Analyst
Caxton FX
Friday, 20 September 2013
Why the Reserve Bank of Australia are in denial
Over the past two RBA monetary policy meetings, the minutes released have revealed a somewhat positive outlook on the housing market. The minutes for the September 3rd meeting reiterated the view that the housing sector has continued to show signs of development. It also outlined that low interest rates have contributed to the improvement in the housing sector.
What is worrying here is the fact that the central bank has failed to identify how this could contribute to another boom-bust housing cycle. Australian homes are already regarded as overvalued, and as the mining boom cools, it is easy for the central bank to become more reliant on the housing sector as a source of growth. The recent uptrend in housing figures from Australia has confirmed this, and with household debt currently at 150% of GDP the Australian housing market is definitely something to monitor.
Even the Aussie’s neighbours have taken steps. The central bank of New Zealand have already acknowledged the potential risk to their economy and have put in place macro prudential policies, such as loan to value ratio restrictions, in order to curb housing related credit growth and price pressure. RBNZ Governor Wheeler outlined that this would help better position banks in the event of shocks, limiting damage to the housing sector and the economy.
The chart below shows the world’s most overvalued economies, with Australia not too far behind New Zealand.
Source: OECD
Sasha Nugent
Currency Analyst
Caxton FX
Monday, 16 September 2013
Caxton FX Weekly Report: Fed tapering decision weighs on greenback
Employment data was all Sterling needed
Although last week was a quiet week for UK data, claimant count figures gave sterling the boost it needed
to see the GBP/EUR rate touch the 1.19 mark. This week is a bit more eventful as Tuesday sees the release
of inflation figures at 09:30. This will be of particular interest as economic data has continuously pointed towards a stronger UK recovery, which has spurred doubt as to whether the timeframe given under forward guidance is appropriate. In a meeting with the Treasury committee, the central bank reinforced that if inflation breached the knockout condition of 2.5% in the medium-term, it would simply cause the monetary policy committee to assess why and then consider what action to take. A high inflation number may encourage speculation that the BoE will re-examine policy and ultimately raise rates earlier than the 2016 benchmark. The BoE monetary policy minutes due on Wednesday morning (09:30) will also be of interest, especially since the central bank didn't provide an accompanying statement following the announcement of the official bank rate. Retail sales figures released on Thursday are expected to follow the trend of recent UK figures and provide upside surprise. This should see sterling remain in control of the GBP/EUR rate, maintaining levels of 1.19 during the week. The GBP/USD rate will see a lot of volatility ahead of the all-important Federal Reserve meeting on Wednesday. The increasing likelihood that the Fed will delay tapering until at least the October meeting, creates a possibility sterling could maintain momentum against the US dollar.
Euro strength falters
Euro strength seen towards the end of August now seems like a distant memory. Since the start of September some eurozone fundamentals have been disappointing, allowing sterling to take advantage. This week sees the German ZEW Economic Sentiment due on Tuesday at 10:00, which is expected to improve to 45.3 from 42.0. Better eurozone figures are unlikely to provide the euro with much momentum, especially as negotiations regarding Portugal’s fiscal target are underway. Despite more disappointing US figures, the euro failed to capitalise and we doubt any eurozone releases will see the euro gain much ground. While we predict the single currency will remain on the back foot against sterling, it may stand more of a chance against the dollar if tapering doesn't begin this month.
to see the GBP/EUR rate touch the 1.19 mark. This week is a bit more eventful as Tuesday sees the release
of inflation figures at 09:30. This will be of particular interest as economic data has continuously pointed towards a stronger UK recovery, which has spurred doubt as to whether the timeframe given under forward guidance is appropriate. In a meeting with the Treasury committee, the central bank reinforced that if inflation breached the knockout condition of 2.5% in the medium-term, it would simply cause the monetary policy committee to assess why and then consider what action to take. A high inflation number may encourage speculation that the BoE will re-examine policy and ultimately raise rates earlier than the 2016 benchmark. The BoE monetary policy minutes due on Wednesday morning (09:30) will also be of interest, especially since the central bank didn't provide an accompanying statement following the announcement of the official bank rate. Retail sales figures released on Thursday are expected to follow the trend of recent UK figures and provide upside surprise. This should see sterling remain in control of the GBP/EUR rate, maintaining levels of 1.19 during the week. The GBP/USD rate will see a lot of volatility ahead of the all-important Federal Reserve meeting on Wednesday. The increasing likelihood that the Fed will delay tapering until at least the October meeting, creates a possibility sterling could maintain momentum against the US dollar.
Euro strength falters
Euro strength seen towards the end of August now seems like a distant memory. Since the start of September some eurozone fundamentals have been disappointing, allowing sterling to take advantage. This week sees the German ZEW Economic Sentiment due on Tuesday at 10:00, which is expected to improve to 45.3 from 42.0. Better eurozone figures are unlikely to provide the euro with much momentum, especially as negotiations regarding Portugal’s fiscal target are underway. Despite more disappointing US figures, the euro failed to capitalise and we doubt any eurozone releases will see the euro gain much ground. While we predict the single currency will remain on the back foot against sterling, it may stand more of a chance against the dollar if tapering doesn't begin this month.
US dollar gets a battering
The dollar took a beating last week, with sterling finishing off the job on Friday, pushing the GBP/USD rate to 1.5876. Poor US figures including non-farm payrolls figures and retail sales has contributed to the dollar’s downfall. The major driver of the greenback this week will be the outcome of the Federal Reserve meeting on Wednesday evening (7pm). A decision to reduce stimulus would see the US dollar rebound, while one to keep the asset purchase program on hold for at least another month could keep the currency vulnerable at least for this week. Dollar strength is mostly dependent on the Federal Reserve’s comments and actions. Even if the Fed decide not to go ahead with tapering this month it is still on the cards, and data from Wednesday onwards could be seen as another opportunity to warrant a reduction in stimulus to begin in October. For this reason we see the dollar remaining vulnerable for the earlier part of this week, with a slight window for strength as the weekend approaches.
End of week forecast
GBP / EUR
|
1.1950
|
GBP / USD
|
1.5855
|
EUR / USD
|
1.3275
|
GBP / AUD
|
1.7175
|
Sasha Nugent
Currency Analyst
Caxton FX
Wednesday, 11 September 2013
Doomed if he does doomed if he doesn’t
What can I say, sterling is just leaving us with our mouths wide open. After last week’s disappointing production figures, it was easy to assume that today’s employment figures would just meet expectations. However, the light shone brightly on the UK this morning, and not only did claimant count smash expectations, but the unemployment rate dropped to 7.7%. All this does is boost market sentiment and confidence about the UK outlook. Now, as much as the UK has produced outstanding figures, one can only wonder about how this affects the BoE’s stance on interest rates and unemployment.
While it is unlikely that strong August figures will alter the central bank’s view on maintaining loose monetary policy, what should be noted is that the better the UK economy does, the more the market will question Governor Carney’s commitment to keep rates low at least until 2016. Today’s release of employment figures are even more crucial considering forward guidance outlined by the BoE.
Shouldn’t we really be thanking the central bank for its pledge to ensure low rates to promote growth, which considering recent figures seems to be doing the job? Yet you can’t help but ask: what about inflation? Currently inflation is above the central bank’s target at 2.8% and with growing domestic demand you must wonder how much further it can push. One thing we can be certain of is that if the recovery continues to be as robust as we have seen, the central bank may have to re-evaluate policy in order to ensure price stability. Not only will the market be listening attentively to the Inflation Report hearings tomorrow, but they will be also anticipating inflation figures released next week. When the going gets tough will Carney abandon his growth commitment and enforce price stability or vice versa? Either way, it looks like something will have to give.
Sasha Nugent
Currency Analyst
Caxton FX
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
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
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