What to take from Chancellor Osborne's Statement

This morning Chancellor Osborne delivered his Spring Budget Statement emphasising the improvements being made in the economy whilst also highlighting the need for more work to be done to support exports, investment, manufacturing and savers. The key points are below:

UK Growth

• OBR has now revised growth higher to 2.7% in 2014 from 2.4% in the Autumn statement, and 2.3% next year, 2.6% in 2016 and 2017 
• The OBR estimates the economy will be larger this year than it was in 2008. 
• 24% fall in claimant count in one year 
• OBR predicts earnings will grow faster than inflation this year 

Public Finances

• The deficit will be 6.6% next year, 5.5% and 4.4% in the following years to reach 0.8% by 2018/19 
• Borrowing will be £95bn, £75bn, £44bn and £17bn in the next few years then followed by a surplus - this year’s borrowing will be £108bn 
• Reduced interest payments as a result of lower borrowing costs will save every family £2000 a year 
• Debt will peak at 78% in 2015/2016 before easing to 76.5% in 2017/2018 
• Welfare cap will be £119bn in 2015-16 and will be voted on in parliament. Any breach will need approval from the parliament - state pensions exempt 

Tax

• HMRC’s budget will be raised to tackle tax avoidance 
• 15% stamp duty on corporates buying houses worth £500k - down from £2m 
• Basic tax allowance will rise to £10,500 and higher rate threshold will rise to £41,865 and then another 1% next year 

Exports

• Double lending to £3bn and interest cut for export financing 
• The taxes on private flights will be increased whilst all long haul flight tax rates will be capped 

Investment

• £200m available to repair roads and local authorities will have to bid for this funding 
• £270m for Mersey Gateway Bridge 
• Extend grants to smaller business to widen apprentices programme 
• Annual business investment allowance of £250k to be doubled and extended to 2015 

Manufacturing

• £7bn package to cut British business’ energy costs 
• Compensation worth £1bn to protect manufacturers from green levies 
• Fuel duty rise due in September cancelled 

Savers

• Cash ISAs and stock ISAs combined into one product and transfers from shares into cash will be allowed 
• ISA limit will rise to £15k 
• Issuance of pensioner bonds and a maximum of £10k can be saved in each bond 
• 10% savings tax rate will be removed 
• Compulsory annuity purchases will be abolished

Caxton FX

Caxton FX Weekly Report: Chancellor's Budget to offer sterling a helping hand

Sterling prepares for a comeback

After weakening at the mercy of buoyant euro, the pound may be preparing to reverse recent losses in the week ahead. Not only is there a busier calendar with labour market figures being published, but the chancellor is also due to present the latest Budget. With the market expecting some upward revisions to the GDP forecast as well as another improvement in public finances, we could see some sterling strengthening on the back of this. The minutes from the last Monetary Policy Committee meeting will also be released and once again the market will be paying attention to the views of the members in order to gauge the likely timing of policy tightening. The Inflation Report Hearing last week revealed some division in the committee about how much spare capacity there actually is in the economy. The MPC judged that spare capacity is likely to range within 1-1.5% and whilst Governor Carney personally felt slack was at the upper end of the range, other members such as Martin Weale felt that spare capacity was something under 1%. It will be interesting to see whether this difference of opinion was reflected in the minutes, and this will most likely cause some volatility. BoE Governor Carney will speak tomorrow afternoon, so we also expect some movement on the back of this.

Euro takes a back seat after a week of strength

Despite some key economic figures due for release in the Eurozone this week, we doubt the performance seen last week can continue in the days ahead. Having said that, reserve managers are still supporting the single currency and as long as the ECB refrain from talking the currency down, we expect the currency to remain fairly robust. What is even more interesting is the fact that remarks from ECB President Draghi outlining the effect euro strength is having on the exchange rate has failed to grab the market. Draghi stated that a 10% trade weighted appreciation of the euro has typically reduced inflation by roughly 40 to 50 basis points, and also claimed that the currency’s strength was “becoming increasingly relevant in assessment of price stability”. This suggests the central bank may become more vocal in their need for a weaker currency if the euro continues to strengthen. The eurozone inflation figures released this morning showed inflation remains at 0.7% y/y and this suggests the euro will be under a bit of pressure this week. Other figures such as German ZEW Economic Sentiment should offer the currency support, however we expect other major events such as the Chancellor’s budget and the Fed meeting to take precedence.

Another $10bn reduction is on the cards from the Fed
The last employment report has provided the market with confidence that the Fed may not have to freeze its wind down of asset purchases when they meet this week. US retail sales and unemployment claims figures supported the greenback last week and there are number of releases due ahead of the Fed meeting which could encourage this further, including building permits and inflation figures. In her first vote on monetary policy as Chair, we expect the FOMC to keep interest rates unchanged and taper asset purchases further by another $10bn when they meet on Wednesday.

Crimea voted overwhelming in favour of joining Russia over the weekend, but the US and EU continue to condemn the vote. For now markets are relatively calm as they wait for further developments, but with the US and EU threatening sanctions could be implemented as soon as Monday, tensions could escalate very quickly in the days ahead. As a result, the greenback could benefit from its safe haven status as the market shifts further away from riskier assets. Taking into account the potential support for the pound, we expect lower levels in cable will be much more difficult to achieve. Weakness in EUR/USD is more likely, especially after inflation data showed CPI at 0.7% y/y.

End of week forecast

GBP / EUR	1.2040
GBP / USD	1.6600
EUR / USD	1.3800
GBP / AUD	1.8450

Sasha Nugent

Currency Analyst

Caxton FX 

Caxton FX Weekly Report: Dollar in favour ahead of Fed meeting

Sterling loses its grip
As expected the pound experienced some weakness against the euro as the ECB held off from easing policy further, and PMI data failed to provide any upside surprise worthy of any significant strengthening. The week ahead presents a light calendar for sterling, which means there is a window open for the US dollar and euro to gain on the back of some strong figures. The main release for the week will be manufacturing production data, which will need to impress in order to keep the pound competitive and prevent any further downside in GBP/EUR. The Monetary Policy committee will appear before the Parliament’s Treasury Committee on Tuesday to discuss the BoE’s latest inflation report. We may see some movement on the back of remarks from Governor Carney, however, we doubt the hearing will have a significant effect on sterling strength.

The euro begins the week in charge
The euro begins the week on the front foot especially after the ECB held rates last week. Their projection into 2016 suggests that, despite inflation remaining below their 2% target, medium to long term inflation expectations are still well anchored. There was also some optimism about growth in the euro area, which provided the currency with some momentum. With the ECB unlikely to take action anytime soon, the euro should be well supported for the next few weeks.

In the days ahead, there are a few opportunities which could help the euro advance further, such as industrial production figures and trade balance data. We expect the light UK calendar will leave the window open for lower levels in GBP/EUR, however, we predict it may be slightly more challenging for the single currency
to drive the EUR/USD rate higher.

Non-farm payrolls provide the dollar with some relief
A slew of US data will be published in the next few days and this has set up the greenback for opportunities to strengthen. The dollar has been particularly vulnerable against the euro as EUR/USD breached 1.39 in the last session. US nonfarm payrolls provided the dollar with a little relief as the figure beat expectations adding 175k workers, preventing a third consecutive poor figure. This has eased pressure on the FOMC which may have been forced to put their tapering plan on pause if the employment report disappointed. The Fed is due to meet next week and for now it looks that the Fed could reduce asset purchases by another $10bn.

Retail sales data released on Thursday will be key, especially after the last reading showed a decline of 0.4% m/m. The market is expecting a rise of 0.3% m/m and any upside surprise will be welcomed considering the weakness we saw last week. Some solid numbers should allow the greenback to get a better handle on the
euro, however, with the amount of investors willing to support the single currency, we expect the dollar will be penalised for any poor results.

End of week forecast

GBP / EUR	1.2010
GBP / USD	1.6600
EUR / USD	1.3840
GBP / AUD	1.8350

Sasha Nugent

Currency Analyst

Caxton FX

No need for further action from the ECB.... for now

The ECB have decided to keep interest rates on hold for yet another month despite concerns that the euro area may slip into deflation. The last inflation reading provided upside surprise and the central bank’s projections show they expect inflation to increase only slightly this year to 1%, to 1.3% in 2015 and 1.5% in 2016. Therefore, the ECB’s medium to long term projections of inflation still remain well anchored and predict inflation will be slightly below the 2% in the fourth quarter of 2016. The ECB remain ready to act however considering the governing council see their “baseline by and large confirmed”, the likelihood of further easing has been reduced.

Taking into account the euros strength over the past few months, it is worth noting that ECB President Draghi estimated that inflation had be reduced by roughly 0.4 or 0.5 percentage points due to the strength of the single currency. Nevertheless this has not discouraged the market from buying euros pulling the GBPEUR rate below 1.21, and EURUSD through 1.3830.

Sasha Nugent

Currency Analyst 

Caxton FX

March 2014 Currency Report: Eurozone inflation eases pressure on ECB

Sterling has remained in favour over the last month although it has lost a little ground. GBP/EUR is still trading above 1.21 whilst levels in cable remain elevated above the 1.67 mark. The BoE Inflation Report was released and the upward revisions in UK growth triggered aggressive sterling buying as optimism about the prospect of a rate hike increased. This month developments in the UK economic climate will be watched
closely especially considering recent concern that growth is slowing.

It is the same story again this month with focus primarily on eurozone inflation and the next move from the ECB. Data last month was not particularly impressive, but GDP figures at least pointed towards a slightly brighter outlook for the euro area. There is still talk circulating about the possibility of negative positive rates and this will be a key discussion ahead of the policy announcement.

The Fed tapering debate continues to be at the forefront of things and now the discussion is surrounding whether the Fed will continue to pull back purchases at the pace of $10bn a month or pick up speed. Economic figures from the US haven’t been particularly impressive over the last month especially the last two payroll readings; another disappointing number this Friday could result in some severe dollar selling.

Pound still in favour, but for how long

Demand for sterling hasn’t faded just yet and some of this is due to orders in relation to the Verizon and Vodafone merger. Other factors underpinning the pounds resilience is the on-going speculation regarding the path of UK interest rates. Although the central bank have consistently reinforced the fact that rates will remain low for a while yet, expectations that policy could tighten in the first half of 2015 have kept the currency competitive. Forward guidance is now based on broader measures with the focus of the MPC on reducing slack and increasing productivity. Comments from monetary policy committee members such as BoE member Weale have encouraged speculation by claiming the bank rate could rise even sooner if wage growth rises more quickly. The revised UK GDP figure confirmed the initial reading of 0.7% q/q growth but what was particularly encouraging was the contribution from business investment and exports. The BoE have highlighted the need for a pickup in business investment to help spur productivity growth, and this figure suggests that the recovery is broadening. As a result we expect sterling bulls will be comforted by this. The pounds performance this month will be partly dependent on whether data releases can keep the optimism brewing. Recently there has been some concern that growth in the UK is slowing and although the second GDP estimate was in line with expectations, PMI data this week will need to impress in order to keep demand for sterling strong. Wage growth in particular will be scrutinized considering the implications this has for monetary policy.

GBP/EUR

Will the ECB act?

Eurozone inflation data was released last week and this has resulted in some repositioning in both the GBPEUR and EUR/ USD rate. A lot of the reasoning behind the euro’s vulnerability has been the uncertainty behind what is to come next from the ECB. Recent data has not been disastrous as GDP data showed the French economy finally returned to growth in the fourth quarter. PMI figures on the other hand were not as positive but what cannot be denied is the progress being made by the euro area.

The reading of 0.8% y/y inflation can be considered a relief if we take into account the potential effect of a dip lower to 0.6%y/y. This would have definitely increased the pressure on the ECB to act. At least for now, the central bank has more room to assess the medium to long term outlook for inflation before deploying their monetary tools. There is still a lack of clarity about what tools in particular the ECB will choose when and if the time comes to act against deflation. Talks of negative deposit rates resurfaced last month and only temporarily weakened the euro. This highlights the uncertainty surrounding the issue and we expect the market to listen out for further clues as to what weapon is the central bank’s first choice.

GBP/USD

Third time lucky?
The past two US nonfarm payroll readings have been disappointing, and adverse weather has been blamed for the poor results. It was hard enough to get the market to swallow that reasoning after the last figure was released, but another weather excuse for this month’s reading won’t wash too well with investors. Other economic figures haven’t been particularly impressive either, as some were also affected by the climate. This month the market needs to see some solid numbers, especially if the Fed is to continue to withdraw their asset purchases.

Fed Chair Janet Yellen testified before the Senate Banking Committee last week and this gave the dollar some support. Taking into account Yellen is considered a dove, her remarks regarding the direction for monetary policy suggested that the recent developments will not result in a halt in the Fed’s tapering plan. The key focus for the market this month will be the decision by the FOMC when they meet mid month. The
statement will provide further clues about the committee’s current stance and attitude toward the pace of tapering. We expect the FOMC to continue reducing purchases by $10bn for now.

GBP/EUR- 1.2170

GBP/USD- 1.66

EUR/USD- 1.37

Sasha Nugent

Currency Analyst

Caxton FX

Caxton FX Weekly Report: Another poor employment report could hurt the US dollar

Can sterling remain in favour?

For yet another week sterling has remained fairly robust, although Eurozone inflation data encouraged some lower levels in GBP/EUR. In the days ahead, opportunity to pare back losses and we expect levels in cable remain elevated as the pound capitalises on weak US data. PMI data is back in focus and after the last round of slightly below expected figures, solid numbers here should keep the pound in demand. What will be key is to see growth in both the manufacturing and construction sectors continue to suggest the economy is gradually rebalancing. The BoE will meet again and announce their interest rate decision which we suspect will not result in much market movement. The outlook for the UK remains positive and as long as UK data continues to display this picture, it is more than likely that sterling buyers will continue to encourage a stronger pound.

ECB to remain on hold after eurozone data
The euro has started this week on a high, and it is unlikely that the ECB will pull the rug just yet. Eurozone inflation rose 0.8% y/y easing the pressure off the ECB and dampening expectations that the central bank will take action at their meeting later on this week. An above expected number hasn’t exactly removed the concern just yet. The reading was only a flash estimate which means there is always room for a downward revision. One thing that seems to be clear is there’s not sufficient evidence to warrant a change in policy from the ECB, and this should keep the euro well supported. Other figures such as retail sales, services PMI data and German factory orders could also support the single currency, although it will be difficult for the euro to advance further against sterling. With the dollar on the back foot and plenty of event risk ahead, disappointing US data could fuel a move further through 1.38 this week.

Third time lucky?
US non-farm payrolls is one of the most influential data releases and after two readings below estimates, this particular reading will be scrutinised. Although remarks from Janet Yellen last week suggest that softer data may not necessarily warrant a pause in tapering, a poor release on Friday may actually change the view of Chair Yellen. Ahead of the release a number of US figures will be watched carefully, as a number of data releases over the past month were affected by adverse weather conditions. Some more positive releases this week should see the greenback in better form, especially if payrolls provide some upside surprise.

The greenback may also receive a lift on the back of tensions in Ukraine. Russia has deployed military forces into Ukraine and they have now taken over army bases in Crimea. As the situation escalates and the West urge the Russian President Putin to withdraw troops, investors move towards safe havens currencies as the prospect of war increases. This should provide the greenback with a little more support, although the extra momentum will not limit the downside if the employment report disappoints.

End of week forecast

GBP / EUR	1.2170
GBP / USD	1.6650
EUR / USD	1.3740
GBP / AUD	1.87

Sasha Nugent

Currency Analyst
Caxton FX

Is the Chinese renminbi now a two way bet?

This week the fluctuation in the Chinese currency renminbi, had the markets worried as the appreciation that had been taking place over a number of years suddenly came to a halt. There were plenty of theories flooding the markets about why the currency and begun to weaken, even though the People’s Bank of China (PBOC) and Beijing had repeatedly made clear their intention to make the currency more volatile. As a result of the longer term trend, the gradual appreciation of the currency had encouraged investors to view the currency as a “one-way bet”, a trend that they were confident would continue.

It now seems that the PBOC have caught the market of guard in an attempt to fulfil their commitment to remove the renminbi's reputation as an effective one sided gamble. Traders now claim it is clear that the PBOC are intervening in order to guide the currency lower which in itself reminds us that the currency is quite a way off being freely floating. The central bank clearly still has the renminbi on a tight leash, adjusting its strength as it sees fit. However, at least this move achieved its goal of creating some volatility, and although we doubt the renminbi is a two way bet at the moment, creating a little uncertainty is certainly a step in the right direction.

Sasha Nugent

Currency Analyst

Caxton FX

Caxton FX Weekly Report: GDP data takes centre stage

Sterling stands firm

Although sterling strength has eased slightly in the past week, there is still plenty of demand for the currency. Even disappointing retail sales figures weren’t enough to really get the downward trend in GBP/USD and GBP/EUR going. In the days ahead there will be much less event risk, which leaves the window open for some lower levels in both these rates. The key release will be the second GDP estimate which is expected to be in line with the preliminary estimate at 0.7%q/q growth. Other economic figures such as CBI realised sales and BBA mortgage approvals should provide the pound with some support ahead of the GDP reading.

BoE Governor Carney will speak later on in the week and with the likelihood of interest rate increases underpinning the currency’s strength, sterling bulls will be watching carefully for any hawkish talk. Considering the momentum we’ve seen over the past couple of weeks we expect the pound will be fairly supported, but a light calendar leaves the currency subject to some weakness.

Time for eurozone inflation once again

Focus will shift towards the Eurozone this week as the flash CPI figure will be released, bringing the next move from the ECB into focus. Eurozone data hasn’t been too disappointing lately disregarding the not so impressive PMI figures. Nevertheless, there was nothing significant to suggest the ECB need to act at their next meeting, and we know from numerous speeches that downside risks need to materialise in order for the ECB to act. A lower than expected number will mostly likely cause some severe weakening in the single currency, especially against sterling.

Other Eurozone figures such as German unemployment change and German retail sales could also offer the currency some support. US data has been disappointing over the past week and some solid figures here could trigger some more euro buying ahead of the inflation release on Friday.

What does US GDP have in store?

In the past few weeks there have been some concerns about US growth, especially considering poor data, in particular the non-farm payroll release at the beginning of the month. Levels in cable remain elevated and US data due this week needs to impress in order to get the downward trend going. The key release will be the GDP reading and growth is expected to slow to 2.6% q/q from 3.2% previously. Adverse weather conditions have had an effect on data recently and we expect some of this will be reflected into the reading. The sharp drop in retail sales also support the likelihood that growth was much softer towards the end of last year and possibly the beginning of this year also.

Any upside surprise in this figure will most likely trigger some dollar buying. The Fed is yet to signal any move away from their current plan to continue tapering and for now this is keeping the dollar afloat. It will be a difficult week ahead for the currency and with the greenback on the back foot, we doubt investors will hesitate to weaken the dollar further on the back of some poor results.

End of week forecast

GBP / EUR	1.2060
GBP / USD	1.6620
EUR / USD	1.3770
GBP / AUD	1.8480

Sasha Nugent

Currency Analyst

Caxton FX

A confidence booster for the BoE

After the last flagship forward guidance from the BoE undermined the credibility of forecasts and expectations, things seem to be getting off to a better start for the central bank. For the first time since November 2009, inflation has dropped marginally below the inflation target to 1.9%, further justifying the need to keep interest rate at current levels.

In the quarterly Inflation Report released last week, the bank predicted inflation would fall below the 2% target and expect lower levels to remain for a while to come. A combination of lower inflation and a decent recovery creates an environment which will allow the BoE to continue to maintain their accommodative stance, and further support the recovery.

There is also a hope that as the recovery gathers momentum, lower price pressures will reflect into rising real wages as pay increases outpace inflation, therefore restoring purchasing power. The next key release will be tomorrow’s unemployment figures and although a drop in unemployment would be positive, the focus will be on wage growth.

For now BoE forward guidance remains credible, however with the market still set on a rate increase in 2015, investors may need a little more convincing that interest rates will remain low for a while yet.

Sasha Nugent

Currency Analyst

Caxton FX

Caxton FX Weekly Report: Sterling keeps the pressure on

Sterling soars
It seems that nothing can stop demand for sterling now. The BoE’s adjustment to forward guidance went down well with the market and fuelled significant strengthening of the pound. Although the central bank ruled out any immediate tightening, confidence about the UK outlook and the prospect for a policy tightening in the first half on 2015 is strong. This week there is an opportunity for the pound to advance further as unemployment data could help the pound rebound after inflation came in below estimates. Some more encouraging numbers here will most likely keep the dollar and the euro on the back foot for yet another week.

The latest MPC minutes will be published, and it is unlikely that this will encourage any significant sterling buying. In the last monetary policy meeting the committee opted to maintain the current level of asset purchases and hold the bank rate at 0.50%. Considering the Inflation Report was released just last week, we doubt rhetoric in the minutes will differ much and therefore expect minimal movement on the back of that release.

PMI attempts to rescue the euro 

Despite some solid GDP figures last week, the euro is still struggling against sterling, and has failed to really push the EUR/USD rate further through 1.37. Growth across the region has boosted hopes that the worst of the regions crisis is behind it and this has made the outlook for the eurozone a little brighter. This week Eurozone PMI data will be key and some impressive results should contribute to more a positive view, and therefore be reflected into euro strength.

Last week talks of negative deposit rates in the Eurozone resurfaced as ECB member Coeure implied the ECB had seriously been discussing this option. Although the effect on the euro was temporary the market is still unsure about what is to come from the ECB, which could keep the euro vulnerable.

An important week ahead for the dollar

The greenback has taken a huge hit, especially against the pound as US data continues to disappoint giving investors more excuses to favour sterling. Comments from Fed chair Yellen were regarded as dovish and this has also weighed on the dollar’s performance. A buoyant pound has pushed cable towards three year highs and with sterling buyers waiting in the wings, US figures this week will need to impress to ease pressure off the dollar.

The Federal Open Market Committee (FOMC) will release the minutes from their last monetary policy meeting. Considering remarks made by Fed Chair Yellen, the market will be looking closely for any sign of a dovish bias from the central bank. Since their last decision to reduce asset purchases further by $10bn, yet another disappointing employment report has been released. Although this is unlikely to have a significant impact on their stance, it has provoked some concern about the labour market and an upbeat tone is needed in order to provide the greenback with some support. Pressure on the dollar has eased slightly, however with plenty of event risk ahead, it may not be long before the dollar is penalised for more disappointing figures.

End of week forecast

GBP / EUR	1.2150
GBP / USD	1.6675
EUR / USD	1.3675
GBP / AUD	1.8550

Sasha Nugent

Currency Analyst

Caxton FX