The euro and other risky currencies continued on their uptrend in February, spurred on by the ongoing impact of the European Central Bank’s (ECB) mid-December LTRO (cheap loan offering), further improvements to the US economic recovery and the emergence of a Greek bailout agreement.
The ECB’s cheap loans have ensured that credit conditions in Europe have eased this year and have fuelled a rally in eurozone bonds. A long-awaited Greek bailout agreement finally arrived in February, quelling fears of a messy Greek default in mid-March.
However, huge uncertainties surround both the Greek and wider eurozone debt situation. In addition, data this year clearly points to the onset of a recession in the euro-area. Asian and Middle-East sovereigns are nonetheless sticking by the euro and persisting with their project of diversifying their FX reserves away from the US dollar.
UK growth data continued on its uptrend in February, with the UK services, manufacturing and in particular, the retail sector, finding some much-needed traction. The Bank of England’s (BoE) Quarterly Inflation Report gave sterling a lift by increasing its long-term forecasts for UK inflation.
A UK interest rate rise remains a long way off- probably at least two years - but a higher inflation projection reduces the Monetary Policy Committee’s (MPC) incentive to introduce further UK quantitative easing (QE). However, this was not enough to stop two MPC policymakers from voting for £75bn, rather than the £50bn that was decided, of additional QE in February, a factor which hurt the GBP/EUR rate in particular last month.
GBP/EUR
Sterling has found it hard going against the euro in recent weeks, stalling at the €1.21 level and subsequently falling three cents (though it has since recovered to trade at €1.1950). The relief that Greece finally managed to break the deadlock and reach a bailout agreement helped the euro.
Consequently, leading stock indices such as the S&P 500 and the FTSE 100 are not far off four-year highs. 10-year bond yields in key eurozone states like Italy and Spain have come back down to a far more comfortable level of 5.0%, thanks largely to the ECB’s LTRO action, and confidence and risk appetite has largely been on the up, which rarely benefits the pound against the riskier euro.
Still, we are confident that the euro will continue to be dogged by negative eurozone headlines throughout this year. The fact that Ireland recently announced it will hold a referendum on the EU fiscal compact agreed in January highlights the scope for delay, market nerves and potential U-turns with regard to long-term political progress on the eurozone debt issue.
Another eurozone frustration is the ongoing wrangling over the expansion of the eurozone’s bailout resources. The current firewall is inadequate to deal with crises in Spain and Italy and it has been made clear that eurozone members must stump up more cash before the IMF makes more funds available. A lack of leadership in the EU will inevitably filter into diminished appetite for the euro.
Furthermore, the Greek situation is far from resolved, despite its recent bailout agreement. In the short-term, Greece still hasn’t reached a firm deal with its private sector creditors on a debt-swap. If the Greek collective-action clause is activated, which will occur if 90% of Greece’s creditors fail to participate in the proposed debt-swap, then the deal would cease to be classed as voluntary and credit default swaps would be triggered, which would likely result in another wave of financial turmoil.
Debt issues aside, the eurozone’s growth outlook also points to weaker sentiment towards the single currency. Whilst the ECB seems satisfied with leaving the eurozone interest rate at 1.00%, instead focusing on monetary easing via the €1trn of cheap loans it has granted in the past three months, the likelihood is that the eurozone as a whole is set to enter a prolonged recession. Data has revealed that the eurozone economy contracted by 0.3% last quarter and PMI data from February suggests Q1 will be little better. That said, one bright spot for the euro has been some improved forward-looking German business and consumer confidence surveys but risks remain to the downside.
As far as the UK economy is concerned, growth data has continued to pick up in the past month, best demonstrated by the strongest monthly retail figure since last April’s Royal Wedding. Despite the familiar and ongoing risks coming from the eurozone, the UK is looking increasingly likely to avoid another quarter of negative growth, which would take it into a technical recession. The BoE added another £50bn to its QE programme last month but the move was fully priced in and sterling weathered the announcement pretty well.
Judging by less dovish comments from Mervyn King of late and the BoE’s recent Quarterly Inflation Report, February’s QE move should be the last of its kind this year, even though MPC policymakers, Posen and Miles, put the market on edge with votes for £75bn.
The most significant risk to sterling continues to be posed by the credit rating agencies. Moody’s put the UK on a negative outlook in February; a loss of the UK’s prized AAA rating is a major pillar of support for the pound and its loss would be very damaging indeed.
Growth will not continue on its current trajectory this year, but the most important thing is that the UK doesn’t slip back into recession. Government borrowing figures improved last month, which should keep debt downgrade fears at bay for now. On balance, we are still betting a double-dip will be avoided in the UK.
€1.18 provided ample support in late February and sterling has since rallied to €1.1950. Largely due to the plethora of risk events that lie ahead in the eurozone, as well as the euro’s rally running out of steam of late, we are looking for a stronger GBP/EUR pairing in the coming weeks and months, which should see it revisit January’s multi month highs above €1.21 in March.
GBP/USD
After a couple of dips below $1.57, sterling has gone from strength to strength in the past week or so. In contrast, the US dollar has seen weak demand this year, amid pretty positive trading conditions; the dollar is always likely to struggle amid rising equity prices. Data from the US economy has played a key role in the improved sentiment within the financial markets.
February’s key monthly US unemployment figure improved for the fourth consecutive month to post a nine-month high. The US manufacturing and services sectors also provided further scope for optimism, as has the recent upward revision of US GDP for Q4 of 2011, which revealed an annualised growth rate of 3.0%.
The steady flow of improved US figures seems to have taken the US Federal Reserve by surprise. Fed Chairman, Ben Bernanke, caused a major stir in the currency markets this week by omitting any references to QE3 in his speech. Instead, he cited improvements to the US economic performance, particularly within the US labour sector. Whilst the Fed has made it clear that it doesn’t anticipate raising interest rates until late 2014, a US outlook with no more quantitative easing is a distinct positive for the US dollar.
It has certainly been a relief to see UK growth pick up in the past few weeks. Whilst it is outperforming its eurozone counterparts, the US economy is the frontrunner and its 2012 outlook is significantly brighter. The UK’s vulnerability to a sharp eurozone downturn outweighs that of the US, which should again favour the dollar as investors assess their options.
In the event that UK growth does run out of steam, QE and debt downgrade speculation will certainly resurface to the detriment of sterling. QE will not be a concern with regard to the US dollar any more, while it has already demonstrated it can withstand a debt downgrade as it did last summer (when S&P cut United States’ AAA rating). These are perhaps longer-term considerations but will doubtless come to the fore in coming months.
We see downside risks to the eurozone situation resulting in a downward correction in global stocks and increased safe-haven flows into the US dollar soon. Asian and Middle Eastern sovereigns are continuing to diversify out of the US dollar into the euro but even this should not be enough to prop the euro up at these levels this year.
We are looking for a major reversal in the EUR/USD pairing, which points to a firmer USD moving forward. This will inevitably weigh on the GBP/USD pairing. In the short-term, we may see sterling make one last charge at $1.60 (which it currently trades marginally below) and beyond, an attempt at $1.61. However, we are looking for GBP/USD to reverse most of its recent gains in the medium term, correcting back down towards $1.57.
Caxton FX one month forecast:
GBP / EUR 1.2150
GBP / USD 1.57
EUR / USD 1.2950
Richard Driver
Analyst – Caxton FX
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Thursday, 1 March 2012
Tuesday, 28 February 2012
Portugal passes bailout review - aid tranche to be released
The main news this morning was that Portugal is to recieve its next €14.6bn tranche of aid under last year's bailout agreement, having passed the Troik's assessment.
The market’s response has been fairly muted but it is definitely relieving news from Portugal.
The Iberian country is clearly next on the market’s ‘hit list’ and this next tranche is essential for eurozone confidence in the short-term. It staves off fears that Portugal is destined to follow the same path as Greece.
Portugal is making the right noises in ruling out the need for further aid but the market is very much in wait and see mode now, the cynics will say they’ve heard it all before.
Ireland has shown that aggressive reforms can actually work and return countries to competitiveness, so there is a precedent to follow there.
The OECD’s research shows that the periphery are actually working hard on their reforms, the problem is it can take a long time for all of the benefits to emerge, time the markets aren’t necessarily willing to grant countries like Portugal.
It will be interesting to see if tomorrow’s 3-year LTRO from the ECB relieves some of the pressure on Portuguese bond yields. Portuguese yields actually increased since mid-December’s LTRO and you’d assume they will be left out in the cold this time, which is a major concern.
Richard Driver
Caxton FX Analyst
The market’s response has been fairly muted but it is definitely relieving news from Portugal.
The Iberian country is clearly next on the market’s ‘hit list’ and this next tranche is essential for eurozone confidence in the short-term. It staves off fears that Portugal is destined to follow the same path as Greece.
Portugal is making the right noises in ruling out the need for further aid but the market is very much in wait and see mode now, the cynics will say they’ve heard it all before.
Ireland has shown that aggressive reforms can actually work and return countries to competitiveness, so there is a precedent to follow there.
The OECD’s research shows that the periphery are actually working hard on their reforms, the problem is it can take a long time for all of the benefits to emerge, time the markets aren’t necessarily willing to grant countries like Portugal.
It will be interesting to see if tomorrow’s 3-year LTRO from the ECB relieves some of the pressure on Portuguese bond yields. Portuguese yields actually increased since mid-December’s LTRO and you’d assume they will be left out in the cold this time, which is a major concern.
Richard Driver
Caxton FX Analyst
Caxton FX Morning Report
Below is a shorterned version of Caxton FX's Morning Report. Please go to the Caxton FX website to sign-up for the full verison of the Morning Report for free.
It was a fairly calm start to the week yesterday, with no data of any major significance and little new information for the markets to digest from the weekend. Rating agency Standard & Poor’s downgraded Greece to the level of “selective default” but the markets were unperturbed, needing no reminder of how serious matters have become there.
Today’s session should be a little more lively; we have a UK CBI realised sales figure released this morning, followed by some durable goods orders and consumer confidence figures out of the US.
It was a fairly calm start to the week yesterday, with no data of any major significance and little new information for the markets to digest from the weekend. Rating agency Standard & Poor’s downgraded Greece to the level of “selective default” but the markets were unperturbed, needing no reminder of how serious matters have become there.
Today’s session should be a little more lively; we have a UK CBI realised sales figure released this morning, followed by some durable goods orders and consumer confidence figures out of the US.
STERLING/EURO: This pair traded pretty flat ahead of tomorrow’s cheap loan offering from the European Central Bank.
STERLING/US DOLLAR: After fading a little yesterday, this pair is back in pursuit of $1.59, which it should achieve this week.
EURO/US DOLLAR: A fairly tame attempt was made at $1.35 but you can expect this level to be given a sterner test.
STERLING/AUSTRALIAN DOLLAR: This pair was once again on the back foot having reached the top of its 2012 trading range.
STERLING/NEW ZEALAND DOLLAR: Sterling also retraced back down below 1.90 thanks to decent risk appetite in US trading.
STERLING/CANADIAN DOLLAR: After a strong week last week, this pair has fallen off by more than a cent from its 2012 highs.
Monday, 27 February 2012
Asian sovereigns propping up the euro, but not for too much longer
Asian sovereigns continue to drive the euro forward
The support that the euro has found in the past week or so is a difficult theme to explain, but market irrationality is no rare thing. Eurozone growth data was awful last week; German growth slowed down and the eurozone manufacturing and services sectors as a whole contracted in January. The market must have priced negative eurozone growth in to a large extent. There was some brighter forward-looking news from the German economy, which the market chose to focus on; a German business climate survey joined mid-February’s economic sentiment survey in beating expectations to the upside.
As has so reliably been the case in recent months, when confidence and investment in the euro from large sections of the market has waned as the debt crisis intensifies, Asian sovereigns’ appetite for the single currency has remained solid. Asian central banks continue to diversify their reserves away from the US dollar in favor of the euro, as they seek to hedge their FX exposure.
The European Central Bank will be launching its second 3-year LTRO programme (cheap loan offering) on Wednesday. The effects of the first round of cheap loans in mid-December have been rightly celebrated as the reason for the stabilization we have seen in the eurozone. Bond yields in crucial countries like Italy and Spain are likely to be brought down again and it is likely to have a positive impact on sentiment towards the euro. Still, we do view the euro to be overbought and continue to anticipate a reversal of what has been a strong start to the year for the currency.
MPC minutes weigh on sterling but losses should be capped
Last week’s MPC minutes saw sterling suffer badly. The minutes revealed that at the rate-setting committees meeting a fortnight earlier, two (out of nine) policymakers had voted for a £75bn increase in quantitative easing, as opposed to the £50bn that was actually decided. It is no great surprise that arch-dove Adam Posen was plumping for further stimulus, though the additional vote from David Miles was a turn-up. Nonetheless, sterling’s losses looked overdone and the likelihood remains that the committees other seven policymakers will be reluctant to step up the BoE’s QE programme once again.
Data last week confirmed that the UK economy contracted in Q4 2011 (by 0.2%). Nonetheless, hopes are cautiously building that positive growth will return in the UK this quarter and a technical recession will be avoided. Whether it will or not should become clearer over the next week, with February’s set of monthly growth updates due from the UK’s manufacturing, construction and services sectors. With little chance of a rate hike in recent months, sterling has not been too responsive to domestic data but with rating agency downgrades looming, improved growth data essential if the UK is to maintain its all-important AAA credit rating.
Sterling is trading down at €1.18 today but the downside potential looks limited. The pound may begin to bounce soon. Against the US dollar, sterling continues to trade robustly. We have seen GBP/USD rejected twice at the $1.59 level during February, which could signal the end of its good run. In line with our bearish view of EUR/USD, we seeing the US dollar returning to favour soon. Another visit back down to $1.57 shouldn’t be too far down the road.
End of week forecast
GBP / EUR 1.19
GBP / USD 1.5750
EUR / USD 1.3250
GBP / AUD 1.47
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
The support that the euro has found in the past week or so is a difficult theme to explain, but market irrationality is no rare thing. Eurozone growth data was awful last week; German growth slowed down and the eurozone manufacturing and services sectors as a whole contracted in January. The market must have priced negative eurozone growth in to a large extent. There was some brighter forward-looking news from the German economy, which the market chose to focus on; a German business climate survey joined mid-February’s economic sentiment survey in beating expectations to the upside.
As has so reliably been the case in recent months, when confidence and investment in the euro from large sections of the market has waned as the debt crisis intensifies, Asian sovereigns’ appetite for the single currency has remained solid. Asian central banks continue to diversify their reserves away from the US dollar in favor of the euro, as they seek to hedge their FX exposure.
The European Central Bank will be launching its second 3-year LTRO programme (cheap loan offering) on Wednesday. The effects of the first round of cheap loans in mid-December have been rightly celebrated as the reason for the stabilization we have seen in the eurozone. Bond yields in crucial countries like Italy and Spain are likely to be brought down again and it is likely to have a positive impact on sentiment towards the euro. Still, we do view the euro to be overbought and continue to anticipate a reversal of what has been a strong start to the year for the currency.
MPC minutes weigh on sterling but losses should be capped
Last week’s MPC minutes saw sterling suffer badly. The minutes revealed that at the rate-setting committees meeting a fortnight earlier, two (out of nine) policymakers had voted for a £75bn increase in quantitative easing, as opposed to the £50bn that was actually decided. It is no great surprise that arch-dove Adam Posen was plumping for further stimulus, though the additional vote from David Miles was a turn-up. Nonetheless, sterling’s losses looked overdone and the likelihood remains that the committees other seven policymakers will be reluctant to step up the BoE’s QE programme once again.
Data last week confirmed that the UK economy contracted in Q4 2011 (by 0.2%). Nonetheless, hopes are cautiously building that positive growth will return in the UK this quarter and a technical recession will be avoided. Whether it will or not should become clearer over the next week, with February’s set of monthly growth updates due from the UK’s manufacturing, construction and services sectors. With little chance of a rate hike in recent months, sterling has not been too responsive to domestic data but with rating agency downgrades looming, improved growth data essential if the UK is to maintain its all-important AAA credit rating.
Sterling is trading down at €1.18 today but the downside potential looks limited. The pound may begin to bounce soon. Against the US dollar, sterling continues to trade robustly. We have seen GBP/USD rejected twice at the $1.59 level during February, which could signal the end of its good run. In line with our bearish view of EUR/USD, we seeing the US dollar returning to favour soon. Another visit back down to $1.57 shouldn’t be too far down the road.
End of week forecast
GBP / EUR 1.19
GBP / USD 1.5750
EUR / USD 1.3250
GBP / AUD 1.47
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Caxton FX Morning Report
Below is a shorterned version of Caxton FX's Morning Report. Please go to the Caxton FX website to sign-up for the full verison of the Morning Report for free.
The weekend saw G20 finance ministers meet in Mexico, where European issues inevitably dominated proceedings. Greater IMF funding was on the agenda but many non-euro states, such as China crucially, are not satisfied with the efforts of euro-area nations to boost its bailout fund (EFSF).
This week’s main event is Wednesday’s second cheap loan offering (LTRO) from the ECB, the first of which has been vital in staving off a credit crunch in Europe so far. Today’s session brings little by way of data other than a pending homes sales figure from the US.
The weekend saw G20 finance ministers meet in Mexico, where European issues inevitably dominated proceedings. Greater IMF funding was on the agenda but many non-euro states, such as China crucially, are not satisfied with the efforts of euro-area nations to boost its bailout fund (EFSF).
This week’s main event is Wednesday’s second cheap loan offering (LTRO) from the ECB, the first of which has been vital in staving off a credit crunch in Europe so far. Today’s session brings little by way of data other than a pending homes sales figure from the US.
STERLING/EURO: Sterling is trading around €1.18 after a three cent drop from its highs last week and remains vulnerable.
STERLING/US DOLLAR: Sterling has been rejected once again at $1.59 though we may see this level tested once again.
EURO/US DOLLAR: The euro continues to trade positively despite the weighty concerns that remain.
STERLING/AUSTRALIAN DOLLAR: Sterling made hefty gains against the aussie dollar at the end of last week and is currently trading at a six week high.
STERLING/NEW ZEALAND DOLLAR: Sterling has made some decent gains against the kiwi dollar, helped by some poor NZ trade balance data.
STERLING/CANADIAN DOLLAR: Sterling is trading at a 2012 high against the Canadian dollar amid diminishing risk appetite.
Tuesday, 21 February 2012
Morning report
Below is a shorterned version of Caxton FX's Morning Report. Please go to the Caxton FX website to sign-up for the full verison of the Morning Report for free.
Eurozone finance ministers have finally struck a deal on granting Greece a second bailout worth €130bn, with the aim of cutting the country’s debt to GDP to 121% by 2020. The news had been priced in over recent sessions to a large extent and the euro failed to sustain any major rally.
Today’s session will inevitably be spent mulling over and analysing the various details of the bailout but it seems that the euro may have made its gains already and we could see another example of ‘buy the rumour, sell the fact’ this week.
STERLING/EURO: This pair came under pressure yesterday as markets priced in the bailout, but the downside was limited.
STERLING/US DOLLAR: Sterling remains well supported against a weaker USD but it may struggle to climb much further now.
EURO/US DOLLAR: The euro is trading fairly well but hasn’t breached early February’s high of $1.33 despite the Greek bailout grant.
STERLING/AUSTRALIAN DOLLAR: Sterling actually recouped ground against the aussie dollar regardless of the (superficially) positive Greek bailout headline.
STERLING/NEW ZEALAND DOLLAR: This pair was fairly range-bound despite slightly softer kiwi inflation data.
STERLING/CANADIAN DOLLAR: With the Greek deal already priced in, this pair was unmoved by the overnight bailout headlines.
Monday, 20 February 2012
Caxton FX Morning Report
Below is a shorterned version of Caxton FX's Morning Report. Please go to the Caxton FX website to sign-up for the full verison of the Morning Report for free.
The major news in the markets this morning is that the People’s Bank of China has cut its reserve ratio, ie the amount of cash banks have to hold in reserve, so as to boost lending and stimulate the Chinese economy. Riskier assets have benefitted from the news.
Today has been billed as the final deadline for a Greek bailout agreement to be made, though it would hardly be a shock to see a deal postponed once again. Based on the assumption that a deal does finally emerge, the euro may see a short-term rally.
STERLING/NEW ZEALAND DOLLAR Sterling remains on a downtrend against the kiwi dollar and amid positive Chinese news, Greek deal expectations and hopes for a RBNZ rate hike, this could well continue.
STERLING/CANADIAN DOLLAR: Sterling is trading in the middle of its two-month trading range despite last week’s strong US manufacturing figures.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
The major news in the markets this morning is that the People’s Bank of China has cut its reserve ratio, ie the amount of cash banks have to hold in reserve, so as to boost lending and stimulate the Chinese economy. Riskier assets have benefitted from the news.
Today has been billed as the final deadline for a Greek bailout agreement to be made, though it would hardly be a shock to see a deal postponed once again. Based on the assumption that a deal does finally emerge, the euro may see a short-term rally.
STERLING/EURO: This pair is trading at the top of its 2012 trading range but could come under some pressure in the short-term if Greece finally delivers.
STERLING/US DOLLAR: Sterling has reached a fresh high against the US dollar and $1.60 is coming back into view.
STERLING/US DOLLAR: Sterling has reached a fresh high against the US dollar and $1.60 is coming back into view.
EURO/US DOLLAR: This pair was a major mover on Friday and has bounced two cents to $1.32, not based on much.
STERLING/AUSTRALIAN DOLLLR: A cut in the reserve ratio in China helped the aussie dollar recoup some of Friday’s lost ground.STERLING/NEW ZEALAND DOLLAR Sterling remains on a downtrend against the kiwi dollar and amid positive Chinese news, Greek deal expectations and hopes for a RBNZ rate hike, this could well continue.
STERLING/CANADIAN DOLLAR: Sterling is trading in the middle of its two-month trading range despite last week’s strong US manufacturing figures.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Friday, 17 February 2012
Strong UK retail sales perfromance triggers hope of positive Q1 growth
January’s growth figure for UK retail sales came in at 0.9%, which is a staggeringly strong showing and well above forecasts of a 0.3% contraction. To put it into perspective, this figure represents the strongest monthly performance since last April’s Royal Wedding bonanza. On the back of December’s strong retail sales growth, this represents an excellent start to the year.
In terms of what products pushed this growth figure so high – January clothes sales were not responsible, rather it was fuel, sporting and household goods leading the way. The UK must be getting more health-conscious; food sales shrank and sportswear sales grew impressively. The hefty discounts seen on UK high streets are obviously being received well at consumer level but it doesn’t reflect well on UK shop-owners, who are quite clearly desperate to stay afloat. A recent report revealed that on average fourteen UK shops closed a day in 2011.
Discounts have obviously had an enormous role to play in the retail sector’s bumper month in January. However, lower prices will have played their part. Last year was characterised by soaring inflation caused by higher VAT, elevated commodity prices and a weak GBP, which saw UK CPI reach highs of 5.2% last September. However, inflation declined sharply to 3.6% in January, which gives an indication as to why UK shoppers stepped up their spending. UK CPI is expected to continue declining aggressively in the coming months, which will be a huge relief to British consumers.
Thursday’s nationwide consumer confidence survey provided an indication as to an improved high street sentiment. The survey jumped to a five month high but still, confidence levels remain at historically very low levels and no one saw this retail sales growth coming.
Nonetheless, the need for caution with regard to the near-term hopes for UK consumers is overwhelming. Household incomes continue to be tightly squeezed and wage growth has been minimal.UK unemployment is soaring and expected to rise further this year.
The UK economy shrank by 0.2% in the last quarter of 2011 and it must rebound into positive territory this quarter if it is to avoid falling into a second technical recession in the space of three years. Fortunately, the Bank of England’s additional quantitative easing appears to be working – January’s growth figures, led by the UK services and retail sectors, have been remarkably positive and a double-dip recession may just be avoided.
With tensions surrounding the eurozone’s growth and debt profile ever-increasing, the near-term outlook for the UK economy has rarely been more uncertain. If the crisis escalates further, the UK economy will be more or less powerless to avoid negative growth.
January’s rate of growth can surely not be sustained throughout Q1 but the unexpected upturn we have seen in recent weeks is welcome nonetheless. From a currency perspective, it has benefited the pound as well, GBP/USD is at a three-month high and GBP/EUR has recently tested a seventeen month high.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
In terms of what products pushed this growth figure so high – January clothes sales were not responsible, rather it was fuel, sporting and household goods leading the way. The UK must be getting more health-conscious; food sales shrank and sportswear sales grew impressively. The hefty discounts seen on UK high streets are obviously being received well at consumer level but it doesn’t reflect well on UK shop-owners, who are quite clearly desperate to stay afloat. A recent report revealed that on average fourteen UK shops closed a day in 2011.
Discounts have obviously had an enormous role to play in the retail sector’s bumper month in January. However, lower prices will have played their part. Last year was characterised by soaring inflation caused by higher VAT, elevated commodity prices and a weak GBP, which saw UK CPI reach highs of 5.2% last September. However, inflation declined sharply to 3.6% in January, which gives an indication as to why UK shoppers stepped up their spending. UK CPI is expected to continue declining aggressively in the coming months, which will be a huge relief to British consumers.
Thursday’s nationwide consumer confidence survey provided an indication as to an improved high street sentiment. The survey jumped to a five month high but still, confidence levels remain at historically very low levels and no one saw this retail sales growth coming.
Nonetheless, the need for caution with regard to the near-term hopes for UK consumers is overwhelming. Household incomes continue to be tightly squeezed and wage growth has been minimal.UK unemployment is soaring and expected to rise further this year.
The UK economy shrank by 0.2% in the last quarter of 2011 and it must rebound into positive territory this quarter if it is to avoid falling into a second technical recession in the space of three years. Fortunately, the Bank of England’s additional quantitative easing appears to be working – January’s growth figures, led by the UK services and retail sectors, have been remarkably positive and a double-dip recession may just be avoided.
With tensions surrounding the eurozone’s growth and debt profile ever-increasing, the near-term outlook for the UK economy has rarely been more uncertain. If the crisis escalates further, the UK economy will be more or less powerless to avoid negative growth.
January’s rate of growth can surely not be sustained throughout Q1 but the unexpected upturn we have seen in recent weeks is welcome nonetheless. From a currency perspective, it has benefited the pound as well, GBP/USD is at a three-month high and GBP/EUR has recently tested a seventeen month high.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Tuesday, 14 February 2012
Moody's downgrades UK outlook but AAA remains intact
Ratings agency Moody's last night slapped the UK with a downgrade to its ratings outlook, doing the same to France and Austria. Moody's also cut the ratings of Italy, Spain, Slovenia, Malta, Portugal and Slovakia. Not the sort of news Europe was hoping to wake up to.
So what's the significance?
We don’t see Moody’s decision to downgrade the UK ratings outlook as overly worrisome. It is just a warning but all the warning signs were already there; it stands to reason that negative growth and climbing public debt will result in a loss of the UK’s AAA rating. Still, after the recent strong PMI figures and last month’s improved public borrowing figures, Moody’s warning will come as a bit of kick in the teeth. Nonetheless, UK debt has climbed over £1trn and the UK ecoonmy looks hard-pushed to grow its way out of trouble any time soon. The Q1 outlook for UK growth is fairly grim but we should see it pick up later on in the year as things stand.
The deciding factor will be developments in the eurozone - regardless of the UK government’s attempts to boost growth whilst cutting debt, if the eurozone crisis escalates then they will prove largely irrelevant. The liquidity operations have reduced the risks of a major collapse in the eurozone but the situation remains incredibly uncertain.
Greece has passed the necessary austerity package and has thus gone a step closer to receiving a second bailout that will avert a messy Greek default in March. However, further budget cuts need to be agreed, a debt-swap still needs to be agreed, and the Troika need to be convinced that Greece can implement its austeirty promises. All this and we face the uncertainty of a Greek general election in April, which inevitably opens the door to policy u-turns. On balance, the UK may just be able to hang on to its AAA rating, provided the European financial system buys enough time to shore itself up.
Sterling has taken the warning from Moody’s in its stride – GBP/USD came off a little last night but this was mainly EUR/USD driven and it has found support at $1.57 regardless.
€1.19 (84p) should hold firm for GBP/EUR, whilst GBP/USD should be able to climb a little higher in the short-term before we see a reversal.
This morning’s UK inflation figure has also failed to leave much of a mark, the market is well aware that prices are set to ease sharply in the coming months.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
So what's the significance?
We don’t see Moody’s decision to downgrade the UK ratings outlook as overly worrisome. It is just a warning but all the warning signs were already there; it stands to reason that negative growth and climbing public debt will result in a loss of the UK’s AAA rating. Still, after the recent strong PMI figures and last month’s improved public borrowing figures, Moody’s warning will come as a bit of kick in the teeth. Nonetheless, UK debt has climbed over £1trn and the UK ecoonmy looks hard-pushed to grow its way out of trouble any time soon. The Q1 outlook for UK growth is fairly grim but we should see it pick up later on in the year as things stand.
The deciding factor will be developments in the eurozone - regardless of the UK government’s attempts to boost growth whilst cutting debt, if the eurozone crisis escalates then they will prove largely irrelevant. The liquidity operations have reduced the risks of a major collapse in the eurozone but the situation remains incredibly uncertain.
Greece has passed the necessary austerity package and has thus gone a step closer to receiving a second bailout that will avert a messy Greek default in March. However, further budget cuts need to be agreed, a debt-swap still needs to be agreed, and the Troika need to be convinced that Greece can implement its austeirty promises. All this and we face the uncertainty of a Greek general election in April, which inevitably opens the door to policy u-turns. On balance, the UK may just be able to hang on to its AAA rating, provided the European financial system buys enough time to shore itself up.
Sterling has taken the warning from Moody’s in its stride – GBP/USD came off a little last night but this was mainly EUR/USD driven and it has found support at $1.57 regardless.
€1.19 (84p) should hold firm for GBP/EUR, whilst GBP/USD should be able to climb a little higher in the short-term before we see a reversal.
This morning’s UK inflation figure has also failed to leave much of a mark, the market is well aware that prices are set to ease sharply in the coming months.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Monday, 13 February 2012
Chaos in Greece but euro to remain firm in short-term
Greek parliament votes on austerity measures to pave way for bailout
Greece is unfortunately in a state of utter turmoil; riots, 21% unemployment, recession and political division. However, as far as the markets are concerned the weekend’s events represent a step in the right direction. The Greek parliament passed an austerity package necessary to receive its second bailout in two years. With this major obstacle removed, global stocks are on the up and the euro is trading positively.
The euro is by no means rallying however. There are potential banana skins for Greece to slip up on between now and Wednesday’s (February 15th) meeting between EU finance ministers. We still need to see a deal on a debt swap between Greece and its private sector creditors, we still need to see some further budget cuts (€325 million’s worth), and the Troika will still want to see evidence of how Greece will implement its austerity promises.
The euro should be able to climb if Greece’s bailout is finally remitted on Wednesday, such are the market’s fears of a failure to do so. However, with the eurozone heading into recession and debt issues elsewhere in the periphery waiting in the wings, this period of improved sentiment towards the euro should be nearing its end.
ECB and BoE hold interest rates, though the latter adds £50bn in QE
The European Central Bank and Bank of England both decided to leave their interest rates on hold at 1.00% and 0.50% respectively. Neither decision comes as much of a surprise, though ECB President Mario Draghi’s press conference has led us to revise our expectations of another eurozone rate cut. The ECB seem content with their ‘QE through the back door’; a second round of cheap ECB loans is scheduled for the end of this month, which should continue to benefit eurozone liquidity and particularly bond market pressures. As a result, we don’t see the ECB cutting interest rates for the foreseeable future.
The Bank of England went with market expectations and added a further £50bn to their quantitative easing programme. The move was fully priced in and did not/does not pose much of a threat to the pound.
Further room for hope in the UK
In addition to January’s broadly positive UK growth figures (particularly from the services sector), we saw some strong industrial and manufacturing production figures last week, as well as an excellent trade balance showing. However, the week ahead provides plenty of scope for sentiment to worsen against sterling. Wednesday brings some UK unemployment figures and Friday brings the monthly update from UK retail sector (which is expected to show a contraction). As ever, external events (namely developments in Greece) should prove far more market-moving.
Sterling is trading at the now familiar level of €1.19 (84p) and seems reluctant to budge at present. The short-term risks this week are skewed to the downside for GBP/EUR but beyond this, we are still targeting levels above €1.20. Against the US dollar, the picture is a little brighter (judging by the last three months). GBP/USD is currently trading at $1.58 and a short-term climb in EUR/USD looks likely to drag this pair by a cent or so higher in coming sessions. This is based on a fairly optimistic view of Greek progress this week. The risks of another twist or two from Greece are significant however and if a second bailout is not remitted, then the US dollar will be a major beneficiary.
End of week forecast
GBP / EUR 1.19
GBP / USD 1.59
EUR / USD 1.3375
GBP / AUD 1.4650
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Greece is unfortunately in a state of utter turmoil; riots, 21% unemployment, recession and political division. However, as far as the markets are concerned the weekend’s events represent a step in the right direction. The Greek parliament passed an austerity package necessary to receive its second bailout in two years. With this major obstacle removed, global stocks are on the up and the euro is trading positively.
The euro is by no means rallying however. There are potential banana skins for Greece to slip up on between now and Wednesday’s (February 15th) meeting between EU finance ministers. We still need to see a deal on a debt swap between Greece and its private sector creditors, we still need to see some further budget cuts (€325 million’s worth), and the Troika will still want to see evidence of how Greece will implement its austerity promises.
The euro should be able to climb if Greece’s bailout is finally remitted on Wednesday, such are the market’s fears of a failure to do so. However, with the eurozone heading into recession and debt issues elsewhere in the periphery waiting in the wings, this period of improved sentiment towards the euro should be nearing its end.
ECB and BoE hold interest rates, though the latter adds £50bn in QE
The European Central Bank and Bank of England both decided to leave their interest rates on hold at 1.00% and 0.50% respectively. Neither decision comes as much of a surprise, though ECB President Mario Draghi’s press conference has led us to revise our expectations of another eurozone rate cut. The ECB seem content with their ‘QE through the back door’; a second round of cheap ECB loans is scheduled for the end of this month, which should continue to benefit eurozone liquidity and particularly bond market pressures. As a result, we don’t see the ECB cutting interest rates for the foreseeable future.
The Bank of England went with market expectations and added a further £50bn to their quantitative easing programme. The move was fully priced in and did not/does not pose much of a threat to the pound.
Further room for hope in the UK
In addition to January’s broadly positive UK growth figures (particularly from the services sector), we saw some strong industrial and manufacturing production figures last week, as well as an excellent trade balance showing. However, the week ahead provides plenty of scope for sentiment to worsen against sterling. Wednesday brings some UK unemployment figures and Friday brings the monthly update from UK retail sector (which is expected to show a contraction). As ever, external events (namely developments in Greece) should prove far more market-moving.
Sterling is trading at the now familiar level of €1.19 (84p) and seems reluctant to budge at present. The short-term risks this week are skewed to the downside for GBP/EUR but beyond this, we are still targeting levels above €1.20. Against the US dollar, the picture is a little brighter (judging by the last three months). GBP/USD is currently trading at $1.58 and a short-term climb in EUR/USD looks likely to drag this pair by a cent or so higher in coming sessions. This is based on a fairly optimistic view of Greek progress this week. The risks of another twist or two from Greece are significant however and if a second bailout is not remitted, then the US dollar will be a major beneficiary.
End of week forecast
GBP / EUR 1.19
GBP / USD 1.59
EUR / USD 1.3375
GBP / AUD 1.4650
Richard Driver
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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