Sentance gives sterling a boost

It seems that this interest rate saga is keeping the market on tenterhooks, with a new twist hitting the headlines this morning. In a nice follow up to my recent blog, the story continued today as Andrew Sentance, a resident hawk in the MPC, more or less rebuffed Governor King’s speech which claimed that the market was “getting ahead of itself” in anticipating an interest rate hike.

In response sterling recouped some of its losses from yesterday, up against most of its major counterparts as Sentance slammed the Central Bank’s economic forecasts, accusing them of understated inflation risks. In his most outspoken attack yet, Sentance made clear his view on the Central Bank’s poor track record in forecasting inflation, and suggested that monetary policy would most likely need to be tightened faster and “more than the markets currently expect” to combat record inflation.

Sentance argued that raising interest rates would bolster the value of the pound, which would help to offset the rising cost of imported commodities – a key contributing factor to the doubling of the banks inflation target.

Although this morning’s comments will no doubt have offered support for sterling, the underlying problems of high unemployment and low real wages may well be reflected in tomorrow’s retail sales data. The market then will now look forward to the MPC minutes, which will be released on Wednesday with baited breath: will we see a third vote in favour of a rate rise? Not just yet would be my guess.

Edward Knox

Analyst - Caxton FX

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Sterling dives on dovish sentiment

Britain’s Consumer Price Index came out yesterday morning with the news that inflation is indeed at 4% - confirmation that inflation is now double the Bank of England’s target rate of 2%.

Having received the news that inflation had hit a 2 year high, and with traders anticipating a near-term interest rate hike, the pound duly rallied across the board.

Today was however a different matter. In a press conference this morning to discuss the recent inflation data, King was typically downbeat on the prospect of raising rates, cooling market expectation with his dovish tone. He alluded to the idea that the Bank may well keep interest rates at a record low to aid the recovery which is “unlikely to be smooth”. He followed this up with clarification that policy makers haven’t actually preannounced an interest-rate increase, suggesting that the market may have “run ahead of themselves”.

The bank today forecast that inflation will quicken from a 2 year high and peak at 4.4% before easing to its 2% target in mid 2012. This came amongst downgrades on its growth forecast.

On this news, an already twitchy market saw the pound fall against all of its major counterparts.

Some in the market then will reconsider whether UK rates will rise as early as mid-year. We will see a fuller picture when the bank releases the minutes from its recent inflation report meeting next week. The MPC members have a tough job in balancing higher inflation with weak economic growth, with King rightly acknowledging that “if you don’t see differences of view in this kind of situation, when ever would you find them?” What is certain, is that the BoE will have to raise interest rates at some point, the market will now however have to reassess when they will pull the trigger with King giving no hints away on timing.

Edward Knox

Analyst - Caxton FX

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Eurozone cracks begins to show

After England’s demolition (yes I think we can go that far) of Italy at the weekend, the theme continues in the currency markets, with the pound rallying against its euro counterpart, climbing up .70% on the day and briefly touching €1.19.

After a lengthy absence from front page news, the eurozone cracks are finally beginning to re-appear, with a plethora of potential problems hitting the headlines once more.

The lack of news coming recently, coupled with euro strength had more or less duped investors into thinking that they had put the eurozone troubles behind them. This is not the case however, as Ireland and Greece reared their ugly heads with signs that all is not well in their respective camps.

Ireland’s main opposition party, Fine Gael, announced today that they would seek a renegotiation of the international bailout that Ireland received should they be elected on February 25^th. Meanwhile Greece, in a sign that they may be struggling to match debt repayments, criticised the IMF and European Union for the stringent terms that were imposed on them.

This comes on the same day that Portugal, (another member of the G.I.P.S.I. family) saw benchmark government debt yields climb to an all time high, above the psychological 7.00% barrier, to 7.37% - a bad sign for the countries borrowing costs. This raises the prospect that the country may yet be forced to appeal for a bailout.

In other news, reports suggested that rescue plans for ailing lender WestLB were under threat, assuring that euro sentiment remained sluggish at best at the beginning of this week.

The main driving force behind the currency markets, EUR/USD, broke below key technical support on this news, and continues to fall with little light at the end of the tunnel in the near term.

A frenetic start then to a busy week – focus has returned to the eurozone with Spanish and Italian bond auctions, and German GDP all still awaited. Meanwhile Britain’s inflation report on Wednesday is looking to overshadow the whole lot as Mervyn King takes the stand.

Edward Knox

Analyst - Caxton FX

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Sterling bulls return for a busy week ahead

Strong PPI data from the UK was largely ignored by the market today, with the pound waning as investors look for clarity after the Bank of England decided to keep interest rates on hold.

Clarity will surely come next week, when the BoE releases its quarterly inflation report which will include their projection for inflation and economic growth over the next 2 years.

Mervyn King, the Bank of England Governor, maintains that inflation is being driven by one off domestic factors such as the rise in VAT, and external factors over which the bank has no control such as spiralling commodity prices, but the market has already priced in an interest rate rise as the fear begins to set in that inflation is becoming entrenched.

Next week could then be a tale of sterling strength amid an extremely busy calendar. The UK’s latest inflation figures are also due on Tuesday and with a forecast of 4.1%, the hawkish policymakers are sure to have the upper hand.

In the eurozone, preliminary GDP figures are released for Europe’s powerhouses, France and Germany. If Britain’s weather afflicted GDP figure was anything to go by, we could be looking at some euro weakness as the readings undershoot expectations.

Other highlights for the week will include the publication of the minutes to the Feds latest meeting. The report is likely to strike a dovish tone with the statement following the meeting a couple of weeks ago reiterating the need to keep monetary policy ultra loose in order to accommodate a recovery in the labour market. The problems surrounding high levels of unemployment appear to be hindering the hawkish mentality of the two most recent additions to the committee.

Despite the pound’s momentum petering out slightly towards the end of this week, I wouldn’t be surprised to see the sterling bulls return as speculation for a rate rise turns to March.

Edward Knox

Analyst - Caxton FX

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UK interest rates on hold

So, despite a build up of speculation to the contrary, the Bank of England’s Monetary Policy Committee decided to keep policy unchanged today, leaving UK interest rates on hold at 0.5%.

Sterling briefly touched a session low against the USD following the decision as hawkish traders rather optimistically priced in a 20% chance of a rate hike. The pound has since recouped its losses with the expectation gaining momentum that the BoE will indeed tighten monetary policy to counteract the rising inflation.

Even amid stronger economic figures, notably from the National Institute of Economic and Social Research (NIESR) which suggested that UK economy grew by 0.6% on the month in January, evidence of a sustainable recovery is still thin on the ground, with the economy facing headwinds from some heavy public spending cuts.

The full outcome of the meeting won’t be known until the minutes are produced in a fortnight; it will be interesting to see whether any of the 6 members currently sitting on the fence decided to take sides, with the pressure to act amid growing inflationary fears certain to have induced some fairly heated debates.

Although the government will undoubtedly be content that the bank decided to hold fire on rates – cushioning the blow on their fiscal tightening  - the same may not be said for sceptics of the BoE, whose line on inflation being temporary is beginning to wear thin a year down the line.

The pressure cooker is well and truly on then; a rate hike is more or less inevitable by May according to the latest consensus.

Edward Knox

Analyst - Caxton FX

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George grinds the gears

Despite the strong anticipation of a rate hike in the UK (as reported in my blog yesterday), the pound has more or less limped to a halt on the back of Chancellor George Osborne’s announcement of his increased tax on banks – imposing the full 0.05% straight away, as opposed to the starter 0.075% levy that was originally planned.

The pound pretty much fell across the board, falling a half cent against the USD and almost a cent against the euro (after 5 consecutive days on the up).

The extra levy will hope to raise £800m as Britain’s government aims to plug its record budget deficit, however the announcement will have come as a shock to banking leaders who are in the middle of negotiations with ministers about project Merlin – a deal looking to make available £190bn of credit for businesses and showing restraint in bonus payments.

George Osborne’s decision to act now, and impose the full levy straight away has been vindicated, he believes, by the increasing financial health that the banks are finding themselves in; the fact that it’s been imposed just before bankers’ bonuses are due will no doubt be seen as a decision based on political pressure.

Public pressure sways politics, and there is nothing more popular than banker bashing! But is this really necessary considering the amount the financial sector adds to the British economy? Banking leaders will meet this afternoon to discuss whether it remains sensible to sign up to Project Merlin – a decision that won’t be taken lightly if the government doesn’t resist the temptation to bash them when the political heat is on.

This sell-off of the pound is likely to be a knee-jerk reaction to the news, in an otherwise quiet day, a blip on the radar in an important week of decisions, but it will be interesting to see how the Chancellor balances the need to keep Britain as the top dog in global financial services against the understandably angry public going forward.

Edward Knox

Analyst - Caxton FX

For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
 

Interest rates - an interesting dilemma

To raise, or not to raise, that is the question: (for this week at least). The Monetary Policy Committee (MPC) meet this Thursday with the market keeping a closer than usual eye on their decision.

Speculation is certainly rife – the pound being the happy beneficiary of this, hitting a 3 week high against the single currency, but how will they vote, and what are the likely outcomes?

The likelihood is that they will leave the rates on hold for now. However, it could well be a much closer call than many expect.  One reason for a possible February rate hike could be if the committee decides to disregard the Q4 GDP estimate; by this stage the MPC will have had access to December’s data for industrial production and construction, and that other bit of crucial information – the January Consumer Price Index data (CPI). If this is overly high, King and his cronies could move to prevent inflation expectations being destabilised.

Andrew Sentance, a relatively long standing hawk on the interest rate dilemma, and Charles Bean – the deputy governor of the Bank of England - further added fuel to the fire in interviews given last week. The latter stated in response to the problem of global commodity price inflation that the committee “may well have to respond to that by keeping domestically generated inflation lower”.

It is not inconceivable then that the bank will raise interest rates as early as February – a modest increase would be favoured over a sharp one. What is certain however, is that there will be a highly nervous market in the coming few days...

Edward Knox

Analyst - Caxton FX

For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.

US payrolls down and unemployment down...huh?

As is too often the case, the US non-farm payrolls offered up less information than it did stir up confusion. The actually employment change was far weaker than the market had hoped for, coming in at an additional 36,000, against forecasts of 139,000. However the unemployment rate dropped from 9.4% to 9.0%. 

This dramatic fall in the jobless level could come as a result of a drop in the number of people actually seeking employment. As they cease to look for work, they cease to be classified as unemployed. The disappointing employment change data is likely to take the prominent position among investors as we head in to next week, but nonetheless the dollar has enjoyed a strong close to the week.

The euro dropped to a ten-day low of $1.3547 as investors used the mixed data as an excuse to cash in on profits. The pound has also lost ground this afternoon, dropping back below $1.61.

However heading into next week, we continue to fly the flag of sterling optimism! When the market looks closely at today’s US employment figures it’s likely to conclude that the Fed are going to be in no further hurry to tighten policy. Indeed, Fed Chairman Bernanke could well reiterate that stance during a speech in front of the House Budget Committee on Wednesday, which would pile the pressure back on the dollar.

Against the euro too we see some upside next week ahead of the Bank of England’s policy announcement on Thursday. The market is pricing in a very small chance that the Bank could actually decide to raise interest rates. We’re unconvinced (as I think most are) that they’ll go ahead with such a move but that won’t stop little rumours being thrown around, which shouldn’t do sterling any harm. 

In the meantime, the currency markets can take a back seat as Twickenham lights up the opening of this year’s Six Nations!  Who guessed it would be Mike Tindall at the helm for England.…!?

Duncan Higgins

Senior Analyst - Caxton FX

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Sterling romps up

Having dropped as low as €1.1530 at the end of January, the pound has enjoyed a strong resurgence this week following some upbeat UK figures. The triple whammy of the three leading industries – manufacturing, construction and services – all came in significantly above forecast, raising the prospects for a strong opening quarter - further discrediting the catastrophic fourth quarter GDP estimates, which showed the UK economy in contraction.

Sterling has been given an additional leg-up from some long overdue euro weakness. In a press conference earlier today, European Central Bank President, Jean-Claude Trichet played down the risk of eurozone inflation stating that inflation risks are “broadly balanced” – a rather beige phrase which more or less summed up the press conference. The market had been pricing in a “ratcheting up” of hawkishness – this damp squib of a comment then more than dampened recent speculation about an interest rate rise which I alluded to in my blog post only yesterday.

More often than not, higher interest rates boost the appeal of a currency so with Trichet stemming that prospect the euro has lost ground. 

The exchange rate has now moved up above €1.18, its highest point in a fortnight. The next key event in the calendar to watch out for will be the Bank of England’s policy announcement on Thursday 10^th. 

Has the market gone too long of EUR-USD? And is this the start of a turn-around for the plucky euro?

Edward Knox

Analyst

Caxton FX



For the latest forex news and views, follow us on twitter @caxtonfx  and sign up to our daily report. 

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Dollar weakness, but for how long?

The start of 2011 has seen the US dollar loosen its stranglehold over both the pound and the euro. Both currencies are continuing to rally strongly in spite of the fragile economic conditions still seen within both camps.

We have seen gains for the Euro and the pound of around 3% and 4% respectively since the beginning of this year, but how long can this dollar weakness last?

The main driving force behind the movement has been the diverging policy stance seen between the Fed and its counterparts across the Pond.  

The Fed has reiterated its desire to keep interest rates low for an “extended period”, alluding to the fact that, despite some decent economic growth (2.9% in 2010), it will continue to keep monetary policy loose in order to stimulate growth and absorb the chronic levels of unemployment.

By contrast there is speculation that both the ECB and BoE could move to tighten policy (ie raise interest rates) in order to curb inflationary pressures. Such a move is still seen to be some months away, but would doubtless come considerably earlier than in the US, which is bolstering the currencies.

Earlier today, one of the two MPC hawks, Andrew Sentance, suggested that the Bank should act sooner rather than later to retain the Banks' “hard won” credibility by keeping inflation in check, and avoid a sudden and heavier rise of interest rates down the line that would “jolt” the recovery. This policy is beginning to gain further credence, with Sentance sticking to his guns despite recent worries of stagflation.

Similarly, Trichet has recently been hawkish about the prospects of raising interest rates – the market expecting this to come in to effect around September, probably as part of his swansong (his term as ECB President is due to end in October).

With this in mind, coupled with the headlines being oddly devoid of any developments with regards to the eurozone debt crisis, it’s hard to see the dollar reversing its current trend in the short term.

Edward Knox
Analyst
Caxton FX

For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.