Weekly Report - Sterling feeling the resistance after a mid-week boost, ECB lays out a clearer plan in the monthly bulletin, dollar takes a beating.

UK – Although the pound is performing very well this last week, there does seem to be resistance from other currencies against the pound, which is limiting its gains. Manufacturing Data on Tuesday gave Sterling a boost, but the question is how long can it stay in the spotlight with limited data in the next week to support it? UK data throughout the week will start off with CPI y/y figures on Tuesday, followed by the Claimant Count Change and Unemployment rate on Wednesday. The house view is that Cable will most-likely retreat from its relatively high levels, as the dollar continues to slowly but surely gain strength as the Federal Reserve winds down the QE programme.

Eurozone – The ECB monthly bulletin made it clear that there was not a change in the Minimum Bid Rate at the beginning of this month because “the moderate recovery of the euro area economy is proceeding in line with the Governing Council’s previous assessment”. However, the bulletin reiterated Draghi’s points from his press conference earlier this month that the ECB stands prepared to act swiftly with monetary accommodation and lower interest rates if required. This has helped to strengthen the Euro at the end of the week. In the next week, the only major event directly affecting the Euro will be German ZEW Economic Sentiment on Tuesday. The Euro ended the week on a high note, as the monthly bulletin last Thursday, combined with positive sentiment toward the Eurozone as the result of a highly-successful Greek bond sale, allowed it to gain strength near the end of the week. However, President Draghi blamed the strength of the Euro for the low rate of inflation in the Eurozone over the weekend, and made the statement that the “further strengthening of the Euro requires further monetary stimulus”, signalling that unconventional monetary policy may not be far away.

USA – FOMC meeting minutes which were released on Wednesday evening of this last week confirmed that there was discussion about the central bank’s collective concern over the low rate of inflation. The concern was not enough to warrant a clearer timeline of when we can expect the next interest rate rise, but the market has interpreted it as a sign that interest rates will stay low for longer, undermining the USD at week’s end. During this next week before the Easter holiday, the data to watch for which will affect the dollar will be Core Retail Sales m/m and Retail Sales m/m on Monday, Core CPI m/m and Janet Yellen speaking at a Federal Reserve conference in Atlanta on Tuesday, Building Permits data and Janet Yellen speaking again at the Economic Club of New York on Wednesday, and finally, Unemployment Claims and the Philly Fed Manufacturing Index data on Thursday. Cable does seem to be at the top of the range, and barring any big surprises in the market, we should see the dollar able to pare back some of the losses it sustained last week against other currency majors.

End of week forecast:

GBP / EUR	1.2100
GBP / USD	1.6650
EUR / USD	1.3750
GBP / AUD	1.7750

Nicholas Ebisch

Corporate Account Manager

Caxton FX

EUR, GBP, JPY benefit from dollar weakness

The dollar index has fallen significantly over the course of the week. This bearish attitude toward the Dollar throughout the week was a result of the Wednesday FOMC meeting in which the members of the Federal Reserve board expressed concern about low levels of inflation. This led to speculation that interest rates will remain low for longer. The Pound, Euro and Yen stood to benefit near the end of this week, as alternative safe-haven currencies, and have increased in value in the last 24-hours as investors have shied away from buying the dollar.

The Euro has improved against its major counterparts as a positive ECB monthly bulletin combined with Greece selling over $4 billion worth of bonds to eager investors on Thursday. The high-demand for Greek bonds on Thursday drew attention to how much those markets have recovered since the days of the Eurozone crisis. With these facts fresh in the minds of investors, the Euro has received a recent bump higher, but these gains may be limited as we currently forecast Dollar and Sterling strength in 2014.

Nicholas Ebisch

Corporate Account Manager

Caxton FX

UK Manufacturing Figures come in very strongly, IMF delivers positive news

This morning’s 9:30AM release of UK Manufacturing Production m/m (1.0%) was the highest increase in manufacturing output since November 2013 (1.2%). This shows that the UK economy is churning back to life in the New Year after the winter months and a revival natural-gas production in February has reportedly helped that along. GBP/EUR is up 0.45% on the day, GBP/USD is up 0.84% on the day, and Sterling has rallied against other currencies across the board for a sustained rate rise throughout the day after the figures this morning. This has increased optimism that the UK is poised for a strong GDP figure for the first quarter of the year and brightened the economic outlook.

Also, the IMF predicted today that the UK will have the fastest growth (2.9% y/y) of the leading G7 economies this year. The UK did not have a completely clean bill of health as the IMF accused the UK of an “unbalanced” recovery with greatly expanded mortgage lending and easier credit conditions. However, for the time being, the overall outlook of the UK is very positive, resulting in a strong pound.

Nicholas Ebisch

Corporate Account Manager

Caxton FX

Conventional and unconventional policies possible from the ECB

The ECB decided to keep interest rates unchanged at 0.25% as expected, but language from ECB President Draghi was dovish and suggested we may see the central bank take action in the next few months. Draghi highlighted the fact that prolonged low inflation itself is a risk, and said the governing council have had a detailed discussion about the possibility of negative position rates. Narrowing the rate corridor and quantitative easing were also measures that were mentioned, with the President claiming QE would need to be designed carefully in order to be effective. Some light was also shed on the strength of the single currency but it was emphasized that any action taken would not be targeted at the exchange rate. Draghi reinforce the fact that he does not see deflation risks in the eurozone, but with these options playing a greater role in ECB meetings, we feel the concern is becoming greater. 

The governing council felt more information was needed about the medium to long term inflation expectations before taking any action, but with different instruments tailored to address various issues it is unclear on what tool exactly the ECB is leaning towards. With the latest reading of 0.5%y/y surprising Draghi, the likelihood of invention in the next few months is increasing.

Sasha Nugent

Currency Analyst

Caxton FX 

April 2014 Currency Report: Will the ECB finally take action?

Market sentiment towards the pound has shifted over the month as investors begin to reassess the likelihood of tighter policy from the BoE. Considering the strength of the pound over the last few months, it is not surprising that we are beginning to see a correction in the GBP/USD rate. With sterling starting the month in a more vulnerable position, upcoming data needs to at least be in line with estimates in order to support the currency.

Demand for the euro resurfaced towards the end of last month. The latest flash inflation estimate has shown price pressures eased further to 0.5%y/y. For yet another month, the market remains firmly focussed on the ECB and whether the latest reading will have any impact on their stance. Considering their forecasts into 2016 suggest inflation will rise, we doubt the central bank will alter policy when they meet later this week.

In the first FOMC meeting since Janet Yellen became Fed chair, comments from the central banker suggested the Fed has more of a hawkish bias than previously thought. This has put the greenback in a better position to begin the month, and another strong payroll figure could encourage more significant dollar buying. Further comments from FOMC members will be watched closely in order to gauge whether Yellen’s comments regarding tightening were a slip of the tongue or other members also carry a more hawkish view.

The market pares back sterling holdings

The pound has advanced significantly over the past few months especially against the greenback and this has been fuelled by rate expectations in the first half of 2015. Over the past few weeks however, demand for the pound has eased and investors are reviewing their holdings of the currency. The market now feels the currency has advanced too quickly and some market participants are paring back their expectations of tighter policy.

The inflation rate has also fallen considerably and the latest reading showed price pressure continued to ease. As long as inflation remains below the 2% the BoE will be justified in its stance to keep interest rates at its current lows. Therefore we doubt there will be any shift in policy from the central bank this month. UK data will need to remain broadly positive in order to keep the currency competitive as the market looks to penalise the pound for any disappointing UK figures.

GBP/EUR

Deflation worries haven’t faded yet

Last month the single currency was supported by the preliminary reading which showed Eurozone inflation edged higher to 0.8% y/y. This reading was revised back to 0.7% y/y but with the latest figure showing inflation fell further to 0.5% y/y there is no evidence just yet that price pressures are building. We know from the central bank’s projections that the governing council still expect inflation to head towards their 2% target, with price pressures just below the benchmark by 2016. With this in mind, it is unlikely that the ECB ease policy further when they meet in the next few days. Downside risks have yet to materialise and medium to long term expectations remain firmly anchored reducing the likelihood of any change in stance from the central bank. Nevertheless, as long as inflation remains around 0.7% the question of whether further easing is necessary will remain.

Asian buyers continue to support the single currency and as long as Eurozone data comes in at least in line with estimates, we suspect the push for lower levels in GBP/EUR and higher in EUR/USD will continue. It will also be interesting to see whether the ECB take this opportunity to talk down the euro. The central bank has avoided verbally weakening the currency but at the last meeting, ECB President Draghi shed some light on the effect a stronger euro is having on inflation. Until the bank outright objects to the euro’s strength we doubt investors will hesitate to boost the currency further.

GBP/USD

Can the greenback keep momentum?

Last month we witnessed a shift in rhetoric from the Federal Reserve and this was enough to at least get the market to buy dollars. In the last Fed meeting, Chair Yellen suggested that we may see US interest rates rise within the first half of next year. The central bank have said interest rates will remain low for a considerable time but the market was under the impression a “considerable” would be longer than 6months after the end of QE. Speeches from Fed members throughout the month will carry more weight as investors attempt to get a handle on the Fed’s more hawkish stance. Yellen may not have meant to give the market a timeline to look towards, either way, much more dovish talk is needed to distract the market’s attention from spring 2015.

Though the dollar is now in a more favourable position, much more impressive data is needed to keep the momentum going. Non-farm payroll figures will be published on Friday and as usual the market will penalise the greenback for any figures below consensus. We believe at least a decent reading will spur greater demand for the greenback, especially if other economic figures ahead of the release also prove to be positive. Provided the employment report is encouraging, we could see the downward trend in EUR/USD and GBP/USD really begin to take hold this month.

GBP/EUR- 1.2160
GBP/USD- 1.6500
EUR/USD- 1.3700

Sasha Nugent
Currency Analyst
Caxton FX 

Caxton FX Weekly Report: Will a lower inflation reading be enough to trigger a move from the ECB?

Retail sales gives sterling a boost, but will PMI figures keep the momentum
going?

Last week retail sales data gave sterling the boost needed to keep the currency competitive, especially against the euro. This week, a slew of UK figures should help the pound remain on the front foot, especially if PMI data continues to suggest growth in the manufacturing, construction and service sectors remained strong. The manufacturing and construction numbers will be of particular interest as the economy continues its efforts to shift away from its dependence on the service sector. Another drop in Eurozone inflation may give sterling a helping hand as the market builds its expectations of a response from the ECB. Things will be more challenging against the greenback as the all important nonfarm payroll figure is due this Friday and is expected to provide the dollar with some momentum. This coupled with some more hawkish language from Fed Chair Yellen could give the greenback the upper hand against sterling.

Asian buyers support the euro despite the drop in Eurozone inflation
This morning Eurozone inflation figures have showed price pressures continued to ease resulting in the y/y reading dropping to 0.5%. The ECB will announce their interest rate decision on Thursday and after this below expected figure, it will be interesting to see if this has had any effect on their stance. We know from the last meeting that the governing council believe inflation will pick up but this number may be a signal that downside risks could be materialising. As a result, pressure on the ECB to act is building, but we doubt the central bank will take action just yet. Despite the unexpected weakening in price pressures, the euro has been fairly resilient thanks to the support of Asian buyers.
Other figures published throughout the week such as Service PMI figures could offer the single currency further support. Upside surprise in unemployment data will be welcomed but on the whole we expect the single currency to be more vulnerable this week.

Dollar still fighting for strength but things could change this week
For weeks the dollar has been penalised for inconsistent data as the market struggles to really get a handle on the economic situation in the US. Some more hawkish comments from Janet Yellen has helped the greenback although an encouraging employment report will definitely help provide the boost the greenback needs. If non-farm payrolls comes in above 200k we could see a shift in sentiment towards the greenback as the prospect of an earlier than expected tightening of policy builds.
There will be more than enough data releases ahead of the employment report to provide the currency with momentum including ISM Manufacturing PMI, Trade Balance and Unemployment Claims. Provided these figures hold up well, there is no reason why we cannot see cable below 1.66 and EURUSD falling below 1.37. UK PMI data will attempt to limit the dollar’s gains but with focus on the US employment report, we feel this reading will take precedence.


End of week forecast

GBP / EUR	1.2120
GBP / USD	1.6600
EUR / USD	1.3690
GBP / AUD	1.8100

Sasha Nugent

Currency Analyst

Caxton FX

Caxton FX Weekly Report: UK inflation to support BoE's stance on accommodative policy

Will inflation drop further?

Sterling managed to recover ground last week, especially after claimant count continued to fall and the Chancellor’s budget went down well with the market. The pressure is still on with inflation data due for release tomorrow. Price pressures have eased considerably over the past few months and a drop further to 1.7% will support the central bank’s decision to keep interest rates at current lows. On the other hand, any upside surprise in this reading will most probably encourage demand for sterling. Retail sales data will also be released and after the last reading showed a drop in sales by 1.5% m/m, a figure that beats estimates will be welcomed by sterling bulls. Other data including current account figures should also keep the currency well supported although we expect it will be more difficult for sterling to advance against the dollar than the euro.

Eurozone PMI figures to spur more euro buying

Despite weakening against both the pound and greenback, the euro still has a fair amount of support in the markets. This morning’s PMI data for the euro area was released and the results were mixed. Although the French manufacturing reading beat estimates at 51.9, the German number disappointed coming in at 53.8. This has prevented the single currency from sustaining levels above 1.38 in EUR/USD and has also given sterling a helping hand in maintaining levels above 1.19. With Asian buyers keeping the pressure on, other figures such as German Ifo Business Climate could encourage further strengthening against sterling, especially if UK inflation figures come in below estimates. Things will be a lot more difficult against the greenback as the market adjusts to the prospects of tighter policy in the US by spring 2015. Considering the market’s reaction to today’s figures, it seems like investors may begin to penalise the euro for any figures that are below estimates. Despite this renewed demand for the greenback, we suspect some solid eurozone data this week will be able to keep the single currency competitive.

Finally a firmer dollar to kick start the week

Yellen did the dollar a huge favour last week whether she meant to or not. In the press conference after the Fed announcement, the Fed chair implied that we could see policy tightening in the US by spring 2015. Despite this encouraging demand for the greenback, it may not be enough to ensure momentum is maintained. A slew of releases due this week including CB Consumer Confidence, New Home Sales and Durable Goods Orders will be watched carefully, and they would need to provide some upside surprise to really allow the greenback to get a handle on the euro and sterling. Today Flash Manufacturing PMI will be published (13:45), and a decent figure here should allow the greenback to start the week on a solid footing.

A number of FOMC members will speak this week and the market will be paying particular attention to the language used. Any hawkish remarks will most likely encourage more dollar buying helping to ease the pressure from a buoyant euro as well as sterling.

End of week forecast

GBP / EUR	1.20
GBP / USD	1.6400
EUR / USD	1.3710
GBP / AUD	1.8300

Sasha Nugent
Currency Analyst
Caxton FX

Fed rate hike in Spring 2015?

Yellen kick started her term as Fed Chair surprising the markets as more of a hawk instead of dove. As expected the Fed continued with winding down asset purchases by $10 but what was unforeseen was the revision to the median forecast of the Fed’s fund rate, from 0.75% to 1% by the end of 2015. More importantly  Yellen’s response to a question about what “considerable” meant in the Fed statement which claimed rates would remain low “for a considerable time”, really caught the market of guard. “Something on the order of around six months, or that type of thing” was her response, which suggests that we could see tightening of policy by spring 2015- far sooner than thought.

The market was under the impression interest rates will remain low through the majority of 2015, but Yellen’s comments imply we could see higher rates around the same time as expected from the BoE. Cable (GBPUSD) fell on the back of these comments, and with the prospect of a rate hike in the first half of 2015 now in play and QE tapering already underway, the slide in cable may finally begin to take hold.

Sasha Nugent

Currency Analyst

Caxton FX

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