Greek set to receive bailout but euro's upside potential looks limited

The euro has enjoyed a remarkably strong start to 2012, rebounding considerably from what was a very steep decline at the end of last year. Greece has been the primary focus of recent weeks - talks stalled between Greece and its private creditors over a debt swap deal and the Greek coalition has struggled to agree on the necessary austerity measures. At last, a Greek deal has been announced, which should pave the way for a €130bn second bailout that will avoid a messy and potential disastrous Greek default.

Growth in the UK economy picked up a little in January, which has fuelled some hope that the British outlook may not be as gloomy as once feared. Growth will remain sluggish even in a best case scenario, so it was always a question of by how much, not if, the Bank of England would increase its quantitative easing programme at its recent meeting. £50bn of additional asset-purchases has been announced but sterling was unaffected as the move was fully priced in.

Despite building eurozone concerns, risk appetite is in fairly good shape at present and this has seen the US dollar weaken off in recent weeks. Nonetheless, we maintain a bearish outlook for risk assets this year and a bullish view of safer currencies such as sterling and the US dollar.

GBP/EUR

Sterling’s progress against the euro has stalled in recent weeks. The imminence of further quantitative easing has pegged sterling back somewhat. However, the key resistance factors for GBP/EUR have been some intense short-covering by a market that had bet heavily against the single currency and some relieving (albeit frustratingly slow) progress towards a second Greek bailout that will avert a default in March.

The current Greek situation remains highly uncertain however. The deal may broadly have been agreed but the Greek parliament still needs to approve it; it contains further crippling austerity measures, which will likely be a tough sell to Greek MPs.

Fears of another eurozone credit crunch have eased in recent weeks, largely due to the ECB’s cheap loan programme to ease credit lines. The cheap loans scheme (which will be replicated at the end of this month) is in effect quantitative easing through the back door and has filtered into the eurozone bond markets, resulting in lower yields across most of the periphery, most importantly in Spain and Italy.

However, Portuguese bond yields have not responded as the ECB would have liked, which indicates that another crisis scenario is just around the corner. Speculation is building that we will need to see another second bailout scenario in Portugal, whose bond yields are on a very similar trajectory to Greece’s last year.

The UK’s AAA credit rating and the demand of UK gilts remain the key drivers of any sterling strength. The market has made its peace with increased quantitative easing from the Bank of England and the issue shouldn’t weigh on the pound too much this year.

A plunge back into recession, of which there is a significant risk, is the main risk factor hanging over sterling. Negative growth combined with ongoing elevated debt levels will surely attract the attention of the rating agencies and the rug could well be pulled from under the pound. Still, some strong January growth figures, typically led by the UK services sector, suggest there is some room for optimism. Add to this the growth-friendly effects of further QE and a double-dip may just be averted.

GBP/EUR has consolidated around the €1.20 mark since the turn of the year and we don’t envisage any major or sustained forays below this level. 84p (or €1.1905) should provide some decent support and the balance of risks look skewed to another move north of €1.20 in coming weeks.

GBP/USD

Sterling has had a superb run against the US dollar, bouncing well off its lows of $1.5250 to trade six cents higher. As evidenced by stronger stocks in January (an historically strong month for equities), risk appetite has been fairly prominent in recent weeks, which has weakened the US dollar considerably. As usual, GBP/USD has tracked a considerable rebound in the EUR/USD pairing, which we don’t see lasting too much longer.

The US Federal Reserve’s announcement that it expects to keep interest rates at record lows close to zero until late 2014 has done the US dollar few favours by fuelling risk appetite. Likewise the greenback’s strange relationship with US economic data has swung out of its favour. The encouraging signs out of the US economy, as evidenced by the lowest unemployment levels in three years, have added to the prevailing risk-friendly environment.

However, once market sentiment sours as a result of the eurozone crisis (as it inevitably will do) and investors flood back into safe-havens as we anticipate, then the robust figures coming out of the US economy should work in the dollar’s favour again.

GBP/USD’s rally looks to have some more legs in the short-term, which could see the $1.60 level tested. Beyond this though, we see the rate coming back down (perhaps quite aggressively) towards $1.55, in line with our bearish view for the EUR/USD pair.

Caxton FX one month forecast:
GBP / EUR 1.21
GBP / USD 1.5750
EUR / USD 1.3050

Richard Driver
Analyst – Caxton FX


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Weekly Round-Up: UK economy picks up, Greece stalls

Greek issue drags on…and on

The euro is holding up remarkably well given the weight of concern that is surrounding Greece and indeed Portugal. Last Monday’s (30th Jan) EU Summit saw Germany’s deficit control proposals finalized and the official scheduling of the €500bn permanent bailout fund’s (the EFSF) introduction for July this year. Positive steps but hardly game-changers.

The issue that continues to obsess the financial markets is Greece. Talks over private sector involvement in a Greek debt swap, which will involve significant write downs on investor holdings of Greek debt, have been the primary focus of the markets for some time now. Agreement is required for Greece to receive the €130bn it needs to avoid default in March. Time and again we have been assured a deal was imminent, but deadlines have been repeatedly been missed and negotiations are ongoing. On balance, there is probably a feeling that a deal will be reached in the end, which will avoid a Greek default for now. However, we are not anticipating a major euro relief rally on the back of any positive announcement.

This is explained by the issues that remain even if a Greek default is averted. Portugal is clearly next in the firing line; Portuguese bond yields reaching fresh record highs is evidence of this. Rating agency Fitch added to the pressure in the bond markets by downgrading several eurozone states last week, including heavyweights Spain and Italy. The euro has actually made a strong start to the year, largely as a result of short-covering, but we maintain a bearish view on the single unit.

UK growth figures raise hope of U-shaped recovery

Last week’s UK PMI figures were broadly very encouraging; the services sector grew at its fastest pace in ten months, whilst the manufacturing sector bounced back into positive growth. The UK construction sector posted another poor figure, but the data as a whole represents a source of hope that Britain can avoid a double-dip recession. This week’s manufacturing and industrial production figures are also expected to return to growth.

This will all be insufficient to dissuade the Bank of England from introducing further monetary easing to the UK economy at Thursday’s meeting (in the form of further QE). However, it should be enough to convince Mervyn King & Co to add £50bn rather than £75bn of QE, which should reduce the downside risks to sterling. The ECB also meet on Thursday and it could well cut its 1.00% interest rate by a further 0.25%, though they may choose to wait a further month.

US recovery continues to impress

Economic figures out of the US economy are on a clear uptrend at present. This was evidenced most importantly by the key monthly labour market update, which revealed 243 thousand jobs were added to payrolls (the most in nine months). Risk appetite away from the US dollar increased as a result of the announcement, but has since been hemmed in by growing frustrations surrounding Greece.

Sterling is trading at 1.2050 against the euro, in the middle of a range that has persisted throughout the start of this year and should continue to do so over the coming sessions. Trading up at $1.58, sterling is performing excellently against the US dollar and may keep on climbing for now, but is due a pullback soon.

End of week forecast
GBP / EUR 1.2025
GBP / USD 1.5850
EUR / USD 1.3180
GBP / AUD 1.46

Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.

Richard Driver, Analyst The pound had another good day against its US counterpart yesterday, cementing its two-and-a-half month high, as Manufacturing PMI data in the UK showed a surprising return to growth. Germany also posted solid manufacturing data, which helped support the euro, trading 0.3% up against the pound yesterday. The near term outlook for Sterling will depend on the Bank of England’s asset purchasing programme. Any surprises to the upside in the UKs Construction and Services PMI data may see a scaling back of the extra 50 billion pounds expected on February 9th. Today the market’s attention will yet again turn to Greece, with concerns likely to mount as we approach the end of the week with no resolution to the debt swap talks in sight. As far as economic announcements go, the markets main interest today will be surrounding the UKs Construction PMI data out this morning, and Fed chairman Bernanke testifying on the economic outlook for the States.
STERLING/EURO: Sterling traded down 0.3% yesterday, but support remains for the pound as concerns over the single currency mount. Concerns that Greece hasn’t yet concluded talks on a debt-swap deal with its creditors, and fears that Portugal may be the next country to ask for a bailout have seen investors cutting their exposure to euro zone sovereign debt and investing in the safer haven UK guilts, supporting the pound in the short term. The UKs economy is still facing the possibility of a recession however, with the Bank of England likely to introduce another bought of Quantitative Easing on February 9th to help ease the flagging economy. If UK construction data is positive this morning, we could see support for the pound as investors scale back expectations of the extent of QE introduced.	FORECAST
STERLING US DOLLAR: Sterling continues to do well against the dollar, but with QE expectations around the corner this rally could be short lived. The pound had a good rally against the greenback yesterday, as dovish tones from the Fed about QE3 and disappointing manufacturing and jobs data combined to weaken the dollar. Talk of introducing another bought of Quantitative Easing in the UK to help a struggling economy will however undermine the pound against the greenback in the short term. If Bernanke is hawkish on the U.S economic outlook today we would expect a reversal of this rally to happen imminently, although market expectations are for him to strike a more dovish tone.	FORECAST
EURO/US DOLLAR: The euro is holding onto gains it made on the 31st January but remains vulnerable to the downside. The euro held onto its gains yesterday as a largely weak dollar failed to capitalise on mounting euro-zone concerns. Strong rhetoric from Angela Merkel about uniting Europe to bring stability to the area met with a risk-on environment, with equities rallying. The safe haven dollar will typically be sold during these fleeting moments of confidence, but demand for the euro remains thin. Concerns over Greece and Portugal will keep support for the euro grounded today as we head towards the end of the week with no resolution in sight. Fed Chairman Bernanke’s speech later on this afternoon will be eyed as a key sign to his economic policy going forward, with direction likely to be dictated on what is said.	FORECAST
STERLING/AUSTRALIAN DOLLAR: the Australian dollar maintained two day gains as Asian equities extended a global stocks rally, spurring investor appetite for higher-yielding assets. The Aussie reached a five-month high after a report showed its country’s trade surplus had increased, and surpassed analyst predictions. Australia’s trade surplus widened in December to A$1.71 billion from a revised A$1.34 billion the previous month, exceeding economist’s estimations of A$1.2 billion. The Aussie also rose yesterday after data showing manufacturing in the U.S. and China expanded. This pair is trading below 1.48 today and looks to be moving lower.	FORECAST
STERLING/NEW ZEALAND DOLLAR: New Zealand’s dollar also maintained its two day gains as Asian equities extended a global stocks rally, increasing appetite for higher yielding assets.  The Kiwi rose yesterday after China and the U.S. manufacturing data was released, showing an expansion and helping New Zealand’s dollar to continue strengthening. Demand for the Kiwi was limited however, after whole-milk powder prices fell for the fourth straight auction. Today we should see this pairing trade within a fairly tight trading range.	FORECAST
STERLING/CANADIAN DOLLAR: The pound is currently holding onto its gains this morning as a positive manufacturing figure yesterday bolstered demand. Sterling is holding onto the gains it made on the 30th January, with a better than expected Manufacturing PMI figure helping to support the pound. There is currently a risk on environment however, as global manufacturing data showed an upturn which will support higher yielding currencies such as the loonie. Today direction for this pair will be dictated by the UKs construction PMI figure. We may see a sell off with a bad figure, but this pair should trade within a fairly tight range today.	FORECAST
This post is prepared by Caxton FX Ltd for information purposes only and may contain personal views that are not the opinion of the company. This is not an offer to purchase or sell any security or an investment advertisement. Caxton FX Ltd is authorised and regulated by the Financial Services Authority, although foreign exchange transactions with Caxton FX are regulated by HM Revenue and Customs. This email does not constitute advice for any foreign exchange transaction, nor is it intended as a solicitation for funds or recommendation to trade.

Morning Report

Richard Driver, Analyst The single currency had a positive early session yesterday, and equities advanced with buyers hoping overnight assurances that the Greek-PSI negotiations were close to a positive conclusion. The extent of market frustration over the dragging out of this Greek debt deal was evident however, as support for the euro soon disappeared when the US started their day. As a result the pound gained almost a per cent against its euro counterpart during the afternoon session. Greek debt-swap talks will again dominate the market today, with traders looking for positive signs of a conclusion by the end of the week. Portugal will also once again feature in investors thinking as they look to sell bills today amid concerns over their economy. Meanwhile the first of the UK’s PMI readings is out this morning with manufacturing expecting to improve slightly.
STERLING/EURO: Sterling is holding onto its gains it made yesterday with the UK’s Manufacturing PMI figure eyed this morning. We will get an idea of the UK’s economic health when the Manufacturing PMI figure is released this morning. Positive readings from each of the PMIs released this week should go some way to discouraging the MPC to introduce another bout of quantitative easing – this would be positive for the Pound, considering it has been largely priced in already. The euro should remain under selling pressure today with Portugal again in the spotlight when it sells 105-day and 168-day bills. Greek talks will again affect this pairing, with investors reluctant to buy the euro on anything less than conclusive action.	FORECAST
STERLING/US DOLLAR: Sterling hit a 2 ½ month high against its US counterpart yesterday amid month end dollar selling. Month-end rebalancing requirements, and slightly improved risk appetitive after positive Chinese Manufacturing data have helped this pair to a 2 ½ month high, with Sterling holding onto its gains this morning. Weak Consumer confidence from the States also put some pressure on the Greenback, with Manufacturing PMI readings from both the UK and the U.S likely to affect this pairing today. Sterling will struggle to hold onto these gains if further negative sentiment is produced from the euro-zone, with investors still favouring the safe-haven dollar.	FORECAST
EURO/US DOLLAR:  The single currency has repaired some of its losses from yesterday this morning, but holding onto these gains will be tough going. The recent strength from the euro, having gained 1 per cent through January, seems to have run its course as it failed to break the key 1.32 resistance level yesterday once again. This is despite broad dollar selling on the back of expectations that the Federal Reserve is paving the way for another bout of QE. The euro will continue to struggle today if Greek debt concerns aren’t resolved. Employment and Manufacturing data from the States this afternoon will also have a bearing on this pair.	FORECAST
STERLING/AUSTRALIAN DOLLAR: The Australian dollar weakened on speculation that U.S. jobs data will forebode a slowing recovery, reducing the demand for higher-yielding assets. The Aussie was earlier supported by China’s Purchasing Managers’ Index which showed the manufacturing sector expand slightly in January, with the Index up to 50.5 from 50.3 in December, above a forecast of 49.5. Unfortunately this did not stall the Aussie weakening against most of its 16 major counterparts as Asian stocks extended losses. This pairing is now trading above 1.48 again.	FORECAST
STERLING/NEW ZEALAND DOLLAR: New Zealand’s dollar similarly to the Australian Dollar, suffered a decline on speculation that U.S. jobs data will show a slowing recovery and dampening the demand for higher yielding assets. New Zealand dollar weakened of the back of Asian stocks extending their losses last night, after a solid day of strengthening against most of its major counterparts.With China being New Zealand’s second-biggest export destination, all eyes were on the Chinese PMI data released. The figures showed an expansion this month to 50.5 from 50.3 in December. This was above the forecast of 49.5 Overall the Kiwi is looking the strongest it has against sterling since September last year.	FORECAST
STERLING/CANADIAN DOLLAR: Sterling gained against the Canadian dollar yesterday as their GDP figure undershot, but declines this morning. Sterling gained against the Loonie yesterday as Canada’s GDP figure undershot expectations, coming in at -0.1% down from an expected rise of 0.2%. This was largely due to a drop in output after a shutdown by crude oil-producers and lower natural gas extraction. Sterling has declined this morning, as manufacturing data from China has improved risk sentiment somewhat, but the price for this pairing will still largely hinge on news coming from the euro-zone.	FORECAST
This post is prepared by Caxton FX Ltd for information purposes only and may contain personal views that are not the opinion of the company. This is not an offer to purchase or sell any security or an investment advertisement. Caxton FX Ltd is authorised and regulated by the Financial Services Authority, although foreign exchange transactions with Caxton FX are regulated by HM Revenue and Customs. This email does not constitute advice for any foreign exchange transaction, nor is it intended as a solicitation for funds or recommendation to trade.

Morning Report

Richard Driver, Analyst The euro made some minor gains last night after the majority of EU states agreed to a German-inspired deficit control treaty at the EU summit in Brussels. This is seen as the first step towards a fiscal union, aiming to strengthen confidence in the Euro-zone. EU leaders also agreed on introducing the €500 billion European Stability Mechanism in July – a year earlier than planned, to help back heavily indebted states. These small steps to help pave the way out of the debt crisis were overshadowed however by yet more quarrelling from EU leaders over Greece and its economic management. The euro may again be under broad selling pressure today with Greece and Portugal in focus.
STERLING/EURO: The euro benefitted from some strong rhetoric yesterday, but Greece and Portugal will be the main concern today. Bargaining with Greece over its economic management, and a debt write-down seemed to overshadow the positive aspects of yesterdays summit. The Greek PM Papademos will hope to complete on debt-swap talks with bondholders by the end of this week with the country facing a 14.5 billion euro payment by 20th March. Concerns over Greece and its debt write-down have led to fears that Portugal may follow suit with the yield on 10-year Portuguese bonds reaching a record high yesterday. This will again be in focus today.	FORECAST
STERLING/US DOLLAR: The pound is currently trading up against its US counterpart as risk appetite increases on euro talks. Greek PM Papedemos said that there had been significant progress on PSI talks, with the market now anticipating that a restructuring deal on Greek debt may be achievable by the end of the week. There will be no guarantees however, and the market will be reluctant to buy into this rhetoric too far given recent history. The pound is also benefitting today from month end selling of the dollar for portfolio adjustments. The upside potential for this pair will be limited however unless there are solid decisions on Greek debt.	FORECAST
EURO/US DOLLAR: The euro is benefitting from increased confidence in the Euro-zone as most countries agree to tighter budget controls. Risk appetite tentatively increased during Asian trading as signs that EU leaders are finally making decisions to help contain the European debt crisis. European stocks are also up this morning, weighing on the safe-haven dollar. This pair should trade in a fairly tight range, with the upside potential for the euro restricted unless Greece are able to clinch a restructuring deal.	FORECAST
STERLING/AUSTRALIAN DOLLAR: The Australian and New Zealand dollars gained as Asian stocks rallied, boosting the allure of higher-yielding currencies. The Australian dollar rallied from one-day declines as Asian stocks advanced after European leaders signalled they’re taking steps toward resolving to the region’s debt crisis. This was helped after Greek Prime Minister Papademos stated that he was strongly committed to reaching a debt-swap accord. The Aussie also rose after a gauge of Australian business confidence climbed to a seven month high. This pairing is trading below 1.48 this morning.	FORECAST
STERLING/NEW ZEALAND DOLLAR: New Zealand’s dollar climbed against 15 of its 16 most-traded peers after a report showed home-building approvals rebounded in the nation. New Zealand dollar rose after home-building approvals increased 2.1 percent in December from the month before, when they dropped a revised 6.2 percent, the statistics bureau said in Wellington today. The Kiwi also enjoyed some strength off the back of Asians stocks advancing. This was caused by the European leaders indicating that they are taking the necessary steps to resolve the sovereign debt crisis. This pairing is currently trading below 1.91.	FORECAST
STERLING/CANADIAN DOLLAR: The pound is trading down on the Loonie today as Canadian GDP is anticipated. The currency was supported by wide speculation that the US’s accelerating growth would mean higher demand for Canadian exports. Todays GDP figure from Canada will be the main focus for this pairing today, with growth of 0.2% expected. Anything less than this will see this pair appreciate.	FORECAST
This post is prepared by Caxton FX Ltd for information purposes only and may contain personal views that are not the opinion of the company. This is not an offer to purchase or sell any security or an investment advertisement. Caxton FX Ltd is authorised and regulated by the Financial Services Authority, although foreign exchange transactions with Caxton FX are regulated by HM Revenue and Customs. This email does not constitute advice for any foreign exchange transaction, nor is it intended as a solicitation for funds or recommendation to trade.

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Morning Report

Richard Driver, Analyst The euro weakened this morning ahead of a gathering of EU leaders in Brussels. The first summit of 2012 aims to endorse a 500 billion-euro rescue fund to be set up this year, as well as put the finishing touches on a German-led deficit control treaty. Risks are however skewed to the downside for the euro, as investors continue to worry that a worsening economy and a lack of firm progress on the Greek debt issue will side-track negotiations. The focus for Sterling this week will be UK PMI data, which will indicate the health of the manufacturing, construction and services sectors. Positive data could scale back quantitative easing expectations and support the pound, with the market currently anticipating that the MPC will vote to add stimulus to a flagging UK economy as early as February 9th.
STERLING/EURO: The single currency declined this morning, as investors eye an Italian bond sale, and developments in the EU summit in Brussels. Concerns mount that EU leaders will fail to draw a line under the sovereign debt crisis, as struggles to complete a Greek debt write-off and now a struggling Portuguese economy threaten to sidetrack other negotiations. Meanwhile, Italy will have another bond auction today, fresh after its downgrade from Fitch ratings agency. A poor turnout will see investors sell the single currency.	FORECAST
STERLING/US DOLLAR: The Greenback has gained this morning with safe-haven flows bucking the trends of the previous week. Slightly weaker than expected US GDP data on Friday weighed briefly on the Greenback on Friday. The economy expanded 2.8 percent in the fourth quarter of 2011, with consensus put at 3%. This compares to the UK’s GDP figure of -0.2% which goes some way to explaining why demand for the dollar has been so high of recent weeks. The dollar is likely to continue to gain today, with European problems thrown into the spotlight with the EU summit. A poor Italian bond auction today will also weigh on risk sentiment, and see investors flee to the safe-haven dollar.	FORECAST
EURO/US DOLLAR: The euro is currently trading down 0.5% against the Greenback, snapping a 5-day advance ahead of the EU summit. Fitch cut the ratings of Italy, Spain, and three other euro-zone countries over the weekend, with Italy facing a bond auction today. Concerns that Italian debt won’t be bought after the Fitch downgrade will weigh on the single currency today, and investors will back the safe-haven dollar. The dollar is also benefitting ahead of the EU summit, beginning at 2pm this afternoon. Despite Greece seeming to get closer to an agreement on a debt write-off over the weekend, investors will be nervous that nothing conclusive has yet been agreed.	FORECAST
STERLING/AUSTRALIAN DOLLAR: Higher-yielding currencies, including the Australian and New Zealand dollars, jumped last week after the Federal Reserve pledged to continue easy monetary policies to prop up the world’s largest economy. Unfortunately for the Aussie, some data from Ratings Agency Fitch soured the mood. The Australian dollar moved further away from three-month highs hit in the wake of the Fed's pledge to keep interest rates low, after ratings agency Fitch put major Australian banks on a negative ratings watch. Accordingly, AUD fell 0.8% against the greenback because of Fitch’s negative outlook on Australian banks. This pair is currently trading slightly higher at 1.4840 this morning.	FORECAST
STERLING/NEW ZEALAND DOLLAR: The Australian and New Zealand Dollars weakened before European Union leaders meet to discuss the region’s debt crisis at a summit in Brussels today. A gauge of New Zealand’s services industry grew at a slower pace last month, according to a report by Business New Zealand, a Wellington-based employer group. The Performance of Services index fell to 50.6 in December from a revised 56.2 in November. A reading above 50 indicates an expansion. New Zealand’s currency halted its longest advance in 10 months as Asian stocks fell, extending a global slump in shares. Today this pairing is trading up at 1.9155, half a cent higher than its opening price.	FORECAST
STERLING/CANADIAN DOLLAR: The Canadian dollar has lost some ground today, but looks set for a good week against the pound. The Loonie will benefit as the US economy continues to improve as its closest and biggest trading partner. The US Federal reserve last week pledged to keep interest rates at almost zero through 2014, which boosted demand for the higher-yielding assets such as the Canadian dollar. On a quiet day in terms of scheduled economic announcements this pair should remain fairly range-bound.	FORECAST
This post is prepared by Caxton FX Ltd for information purposes only and may contain personal views that are not the opinion of the company. This is not an offer to purchase or sell any security or an investment advertisement. Caxton FX Ltd is authorised and regulated by the Financial Services Authority, although foreign exchange transactions with Caxton FX are regulated by HM Revenue and Customs. This email does not constitute advice for any foreign exchange transaction, nor is it intended as a solicitation for funds or recommendation to trade.

Morning Report

Richard Driver, Analyst Amid a rare shortage of market-moving headlines, yesterday was a session of plenty of range-bound trading. Today’s session brings a crucial US and indeed global economic indicator; the advance American GDP figure for the fourth quarter of 2011. The US economy is expected to have grown at an annualised pace of 3.0%, which when compared to the UK’s 0.2% contraction, goes some way to explaining our preference of the US dollar to sterling this year. This afternoon also brings some words from ECB President Draghi and no doubt some speculation about a Greek deal, as another week threatens to have passed with no progress.
STERLING/EURO: Data from the UK economy has started 2012 poorly, but this pair remains supported at the €1.19 level. In addition to the disappointing UK GDP figure on Wednesday, we saw the worst showing on the monthly CBI realized sales gauge in almost three years. The pressure will remain on sterling next week, with January’s monthly instalment of growth figures due from the UK construction, manufacturing and services sectors. There has been talk in recent sessions of a Greek deal by the end of the week, but it seems likely that we will be disappointed. All the while, concerns are building around Portugal. This pair is trading up towards €1.20 this morning.	FORECAST
STERLING/US DOLLAR: The dollar remains under pressure from Wednesday night’s dovish news from the Federal Reserve. Sterling maintained the front foot against the US dollar, as appetite for risky assets continued on their upward trend and weakened the greenback. Durable goods data was good yesterday and US GDP is likely to be strong today as well. The US housing sector remains in trouble and obviously unemployment is still a top priority, but generally speaking the US economy is starting to enjoy a fairly broad-based recovery. Sterling continues to trade up at an impressive $1.57 level and we are still betting that this pair could decline (fairly sharply) at some point soon.	FORECAST
EURO/US DOLLAR: This pair climbed to a six-week high, five cents off mid-January’s lows, despite ongoing Greek worries. There has been plenty of talk in the headlines about Greece’s need to get this deal done and the need to avoid a chaotic default in March. This is capping this euro rally to some extent. Also capping the euro’s gain were rising Portuguese bond yields, the market is beginning to realise that even if the Greek situation does resolve itself, Portugal is likely to take a similar path and beyond this, possibly Italy and Spain. This is why we bet on a weaker euro this year.    Nonetheless, this pair is trading at a relatively impressive $1.31 this morning and we could see further upside here for the time being.	FORECAST
STERLING/AUSTRALIAN DOLLAR: Sterling remains close to record lows against the aussie dollar, with Russia looking at investing in the Antipodean currency. Russia has expressed an interest in the Australian dollar, as it attempts to diversify away from GBP, EUR and USD.  Australian growth, while it will slow down in line with China, remains ahead of most developed global economies. Importantly, Australia has maintained its AAA credit rating. They key downside risks to the aussie dollar are interest rate cuts and rhetoric from the Reserve Bank of Australia against the strength of its currency. Accordingly, this pair is trading down below 1.48 and sterling is likely to remain under pressure today.	FORECAST
STERLING/NEW ZEALAND DOLLAR: Sterling continued on its downtrend against the kiwi dollar, which was helped by some strong NZ trade balance data. The kiwi dollar benefitted from an unexpected trade surplus in December, its first in five months. The kiwi dollar has proven increasingly resistant to alarm bells from the eurozone of late, which removes a lot of the downside risks to NZ currency. This pair is trading below 1.91 and should remain under plenty of pressure if the US GDp figure comes in strong as expected.	FORECAST
STERLING/CANADIAN DOLLAR: Weaker US stocks weighed on the Canadian dollar yesterday and sterling was able to recoup a modicum of ground. The US economy’s two weak points were highlighted yesterday, with weekly unemployment claims rising unexpectedly and US home sales dropping unexpectedly. Still, the big news this week that Fed rates will remain at record lows until late 2014, combined with what is likely to be a strong US GDP figure this afternoon, should keep the loonie strong against sterling. Sterling is trading around the 1.57 mark and we expect the loonie to regain the initiative today.	FORECAST
This post is prepared by Caxton FX Ltd for information purposes only and may contain personal views that are not the opinion of the company. This is not an offer to purchase or sell any security or an investment advertisement. Caxton FX Ltd is authorised and regulated by the Financial Services Authority, although foreign exchange transactions with Caxton FX are regulated by HM Revenue and Customs. This email does not constitute advice for any foreign exchange transaction, nor is it intended as a solicitation for funds or recommendation to trade.

Morning Report

Richard Driver, Analyst Data yesterday revealed that the UK economy shrank in the final quarter of 2011 (by 0.2%). Sterling didn’t suffer as a result though, the market clearly feared an even worse figure. The MPC minutes, whilst showing some differences of opinion, added to expectations that the Bank of England will step up its quantitative easing programme next month. Elsewhere, the US dollar weakened off as the Fed committed to keeping its interest rates at record lows until late 2014, well beyond the initially promised mid-2013. The markets are likely to continue to mull over last night’s news from the Fed.
STERLING/EURO: Sterling once again came under pressure, though not necessarily due to the poor UK GDP figure. Data yesterday revealed that the UK economy made its first step towards a technical recession last quarter (two consecutive quarters of negative growth are required to be officially in recession). The -0.2% figure was slightly worse than median forecasts, though clearly better than many had feared going into the release. The UK services sector just about avoided contraction, but the same cannot be said of the construction and manufacturing sectors. We are still waiting on deal from Greece on the debt swap, hopes have been raised that we will see an agreement by the end of this week but we are more than likely to be disappointed. Sterling benefits from some decent support at the current levels of €1.1950, so risks are to the upside here.	FORECAST
STERLING/US DOLLAR: Sterling makes some more impressive gains as a result of a dovish US Federal Reserve statement and press conference. The news that US interest rates will stay at their current record lows until the end of 2014, a year and a half longer than indicated last year, had the logical impact of weakening the US dollar yesterday. Hopes for more quantitative easing will have been stoked by last night’s dovish performance from Fed Chairman Ben Bernanke, though it is doubtful that this will be utilised whilst US figures continue on their current uptrend. As far as the MPC minutes were concerned, there was no unanimity on the need for further QE next month, though there was enough evidence of support for a February move. Sterling is trading at $1.57 this morning, which again represents a strong level in the context of the past two months. We may see a pullback today though.	FORECAST
EURO/US DOLLAR: This pair received another welcome boost as focus moved from eurozone concerns to the Fed’s dovish interest rate outlook.  Eurozone debt concerns have been put on the backburner somewhat in the past day, as the market zeroed in on US Federal Reserve monetary policy. Bernanke reminded the markets that the US economy is not out of the woods yet; it certainly had a strong fourth quarter but remains vulnerable to volatile events in the eurozone. This pair is trading at a strong $1.31 this morning, which represents a six week high. We are still betting that this pair will return to levels below the $1.30 benchmark before too long.	FORECAST
STERLING/AUSTRALIAN DOLLAR: Despite a slightly more dovish Reserve Bank of New Zealand interest rate outlook, the kiwi gained more ground on the Fed news. Investors commonly pursue the carry trade; this is where they borrow at low interest rates close to zero (as we are seeing with the dollar in the US), and park those funds in a higher yielding currency such as the Australian dollar (which currently offers a 4.25% interest rate). It is little surprise that the Fed’s announcement of “low rates for longer” gave a boost to risky assets. Accordingly, sterling stooped to new record lows against the aussie dollar down near 1.4750 and this pair is likely to remain under pressure.	FORECAST
STERLING/NEW ZEALAND DOLLAR: Further gains in Asian stocks and sterling weakness this morning has seen this pair lose ground. The RBNZ kept interest rates on hold at 2.50% last night as expected. However, the rhetoric changed from “on hold for now” to “on hold,” suggesting that the RBNZ is happy with the current rate and not looking to hike any time soon. Governor Bollard noted that the stronger NZ dollar is hurting kiwi exports, which could well deter the market from sending the dollar too much higher. This pair is trading at 1.9150 this morning and a test of the 1.90 benchmark seems likely before long.	FORECAST
STERLING/CANADIAN DOLLAR: This pair was range-bound despite some stronger than expected Canadian retail sales data. The loonie benefitted from hefty gains in US stocks yesterday, as risky assets boomed in response the news from the Fed. Durable goods data is likely to be strong today, which will reflect well on the Canadian economy. This pair remains in range despite the news from the Fed. A move lower here still looks a good bet.	FORECAST
This post is prepared by Caxton FX Ltd for information purposes only and may contain personal views that are not the opinion of the company. This is not an offer to purchase or sell any security or an investment advertisement. Caxton FX Ltd is authorised and regulated by the Financial Services Authority, although foreign exchange transactions with Caxton FX are regulated by HM Revenue and Customs. This email does not constitute advice for any foreign exchange transaction, nor is it intended as a solicitation for funds or recommendation to trade.

UK GDP points to recession and MPC minutes point to part of the solution

UK GDP figure disappointing

This morning was a big one for the UK economy and sterling. The UK GDP figure for the final quarter of 2011 came in at -0.2%, whilst the minutes from the MPC's meeting a fortnight ago indicated the BoE's QE programme will be expanded next month.

This morning’s UK GDP figure is certainly disappointing, but with sterling gaining after the release it is quite obvious the market was positioning itself for an even worse showing.

The UK's services sector has just about kept its head above water, but manufacturing and construction has been a letdown and the labour market is still in the doldrums. Yesterday’s IMF downgrade of UK growth prospects this year has certainly been vindicated.

The data clearly strengthens the argument that the UK economy is heading into tougher times. With the eurozone debt crisis likely to weigh on European and domestic growth for many more months to come, the UK looks likely to enter a technical recession.

So how can UK growth be boosted?

Well, the Bank of England is already trying to do so through its 275B quantitative easing programme. Today's MPC minutes reveal that the nine-member committee is ready to step it up again next month.

Adam Posen will be feeling particularly smug right now - he has staked his reputation on the UK economy's need for more QE and his colleagues in the MPC have had to come round to his way of thinking.

It was no surprise to see all nine policymakers voting to leave the current QE programme on hold. February has long been earmarked as the month to step up asset-purchases. High inflation looks as if it will no longer be an issue in 2012 (UK inflation dropped from 4.8% to 4.2% in December alone); the UK economy needs more from the Bank of England printing presses.

However, it does not look as if a decision to expand QE next month will be unanimous, the minutes include comments such as- "the risks to inflation were more finely balanced and it was less clear that inflation would fall below the target in the medium term." The risks of UK inflation undershooting the BoE's 2.0% target are a key motivation for QE. Nonetheless, this morning’s poor GDP figure highlights the UK economy's dire need for help and we still bet this will come in February. .

Richard Driver
Analyst – Caxton FX
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Morning Report

Richard Driver, Analyst  Greece was asked to provide a written commitment to enact the reforms that are required for the country to be granted its second bailout (which, it is hoped, will avoid any u-turn as a result of upcoming Greek elections). It is quite clear that stronger eurozone states are losing their patience with Greece; specifically its reforms have been insufficient. Today’s session brings the all-important UK GDP figure for the final quarter of 2011; a 0.1 - 0.2% contraction is expected – sterling’s fate in the short-term really depends on where the figure comes in with respect to this expectation.
STERLING/EURO: This pair continued to trade within a fairly narrow range, with levels just above €1.19 providing some decent support. We saw some better than anticipated public borrowing figures out of the UK yesterday, though sterling failed to capitalise given that the headlines focused on the fact that UK public debt has now hit one trillion pounds. A poor UK GDP figure has been priced in by the market by now, but an undershoot will surely weigh on sterling as investors fear recession. The MPC minutes are also released this morning and given Mervyn King’s speech last night, which alluded to the likelihood of further QE, we can expect further dovish language from today’s MPC release. More QE in February has been expected for a while now, so this should not weigh on sterling too badly. For now, this pair trades at €1.1950.	FORECAST
STERLING/US DOLLAR: Sterling ticked higher against the US dollar, but faces plenty of downside risks this morning. The case for safe-haven currencies in the longer-term was bolstered yesterday by an understandably negative assessment of the global economic outlook from the International Monetary Fund. The IMF cut its outlook for global growth in 2012 from 4.0% to 3.3%. Ominously, the IMF cut its UK forecasts for this year from 1.6% to 0.6%. This evening brings the all-important US Federal Reserve statement and press conference. Bernanke will be revealing the projections of a Fed rate hikes by the Fed policymakers, which could cause some interesting moves as investors revise their positions. As far as rate hikes in the US are concerned, we are looking beyond mid-2012. This pair is trading at a comfortable $1.56 this morning, further upside again looks limited.	FORECAST
EURO/US DOLLAR: The euro continues to trade above the $1.30 level despite a sell-off in European stocks, helped by another positive Spanish debt auction. Spain enjoyed another successful debt auction yesterday and the euro could well benefit from a positive German business climate survey this morning. Germany’s economy is showing signs that it may avoid a recession after all, which of course brightens the picture in the eurozone as a whole, though it looks as if the region will fall back in to recession regardless. The euro is trading marginally above $1.30 this morning and may find further support if the Fed reveals that interest rates will remain at record lows for even longer than expected.	FORECAST
STERLING/AUSTRALIAN DOLLAR: Australian inflation data provided the aussie dollar with another push in the right direction. Whilst Australian CPI was unchanged from the fourth quarter of 2011, core Australian inflation came in above expectation to trigger some positivity to the aussie dollar. The Reserve Bank of Australia is nonetheless expected to cut rates to 4.0% next month, not least because the strength of the currency will be hurting the Australian economy. Sterling is trading back down at the familiar 1.48 level and risks look to be skewed to the downside for today.	FORECAST
STERLING/NEW ZEALAND DOLLAR: Further gains in Asian stocks and sterling weakness this morning has seen this pair lose ground. The Nikkei share index gained by another percent last night, evidence of further regional risk appetite. There was some decent NZ manufacturing data last night and credit card spending also ticked up. Moves in the kiwi dollar are likely to be dictated by tonight’s Fed statement and press conference, but the Reserve Bank of New Zealand’s rate statement will still be important beyond the very short-term. The central bank is expected to leave rates on hold at 2.5%. This pair trades at 1.92 for now.	FORECAST
STERLING/CANADIAN DOLLAR: This pair was range-bound despite some stronger than expected Canadian retail sales data. Canadian retail sales data came in higher than anticipated but this was all just a prelude to tonight’s crucial US Federal Reserve meeting. Expectations for a low UK GDP figure are hurting the pound this morning, but it can just as easily rebound if the data provides an upside surprise. Sterling continues to trade in the 1.57-58 area, as it has done all week. All eyes are on the Fed for major moves in this pair.	FORECAST
This post is prepared by Caxton FX Ltd for information purposes only and may contain personal views that are not the opinion of the company. This is not an offer to purchase or sell any security or an investment advertisement. Caxton FX Ltd is authorised and regulated by the Financial Services Authority, although foreign exchange transactions with Caxton FX are regulated by HM Revenue and Customs. This email does not constitute advice for any foreign exchange transaction, nor is it intended as a solicitation for funds or recommendation to trade.