Sterling remains flavor of the month
Sterling has climbed by a further three cents against the euro in the past fortnight. Sterling’s progress against commodity currencies such as the AUD, NZD, CAD and ZAR has been ever more impressive in the past few months. Sterling has climbed by over 10% against the ZAR and NZD since mid-Feb, while it has advanced against the ZAR by the same margin since mid-March.
Sterling’s safe-haven status is behind its demand and this is not something we see disappearing any time soon. Also helping the pound was last week’s MPC vote against further quantitative easing. Whilst there will be some nerves surrounding the voting pattern (to be revealed by the MPC minutes next week), stubbornly high inflation seems to be of greater concern to the policymakers (thus making more QE harder to justify). Tomorrow’s Quarterly Inflation Report from the Bank of England will be highly relevant in this regard. A firmer inflation outlook is likely to be provided, which again should be broadly supportive of the pound.
Euro suffers from lack of Greek coalition agreement
Global investor confidence and risk appetite has taken a turn for the worse in the past fortnight, driven by concerns over Greece. Since the failure of the ruling Greek coalition to maintain sufficient votes at its recent election, major doubts have arisen as to whether Greece will remain within the euro. Coalition talks have collapsed and another election will be held in mid-June, which means the current uncertainty will be extended. As a result, Spanish and Italian bond yields are on the rise, with the former’s 10-year debt yields looking particularly alarming at fresh 2012 highs over 6.25%.
Should an anti-austerity coalition government surface from the current mess, then Greek bailout funds would be withheld, leading to default and a probable Greek breakaway. The knock-on effects in the eurozone and the global financial system as a whole are expected to be more drastic than those of Lehman’s collapse. It is no surprise then, that the euro has suffered a significant decline, with perceived safer-currencies such as sterling and the US dollar filling the void.
GDP data out of the eurozone was very mixed indeed this morning. Italy broadly stuck to the script by contracting by 0.8% in Q1 of this year, while French growth remained stagnant. However, the German economy grew by 0.5% in Q1, which helped the eurozone economy as a whole avoid a technical recession by posting a 0.0% GDP figure. This development has given the euro a mild boost today but with so much austerity still to be delivered in the eurozone and today’s forward-looking economic sentiment surveys showing a fairly sharp decline, eurozone growth is highly likely to return to negative territory this year.
Sterling is trading at €1.25 today, which represents near enough a three and a half year high. We are not calling a top to this pair’s ascent just yet either, with nerves surrounding Greece likely to deteriorate over the coming weeks. In risk averse conditions, the pound has understandably traded a little softer against the US dollar, coming off its highs of $1.63 to trade two and a half cents lower today. This pair could well test the $1.60 level fairly soon, though we are not anticipating any major collapse.
End of week forecast
GBP / EUR 1.26
GBP / USD 1.5950
EUR / USD 1.27
GBP / AUD 1.61
Tuesday, 15 May 2012
Wednesday, 2 May 2012
Monthly Report: GBP/EUR and GBP/USD
Sterling has performed excellently in the past month, hitting fresh multi-month highs almost across the board. Some notably less dovish Monetary Policy Committee (MPC) minutes provided the trigger for a sterling rally in April, with the market subsequently betting against the likelihood of further Bank of England (BoE) quantitative easing (QE) - a key factor which has weighed on the pound over the past seven months.
The Office of National Statistics (ONS) last week announced the disappointing news that the UK economy contracted by 0.2% in the first three months of 2012. Taken with Q4 2011’s 0.1% contraction, this latest GDP figure signalled the UK having entered a technical recession. Nonetheless, sterling continues to enjoy strong demand as circumstances worsen on the continent.
The US dollar is still struggling to capitalise on its economy’s comparative strength. US growth data has fallen off its impressive uptrend somewhat, as shown by April’s softer unemployment figures and the recent undershoot in the first quarter US GDP figure.
This has played into the hands of the more cautious members of the US Federal Reserve, including Chairman Ben Bernanke, who refuse to rule out the possibility of another round of US quantitative easing. The market is becoming increasingly obsessed with the Fed’s monetary policy outlook and ongoing QE3 speculation continues to hurt the dollar’s performance.
The eurozone’s debt and growth situation is looking no better and worryingly, perhaps as a result of this lack of progress, the eurozone has become embroiled in fresh political uncertainty. French President Nicholas Sarkozy, could well suffer electoral defeat on the 6 May, whilst Greece will be holding parliamentary elections on the same date. Both elections could have significant ramifications on the direction of eurozone debt crisis in the short and long-term.
GBP/EUR
April saw sterling finally break away from the €1.21 level that had proven so sticky in the year to date. News out of the eurozone has been distinctly negative of late but unusually, the latest direction in this pair wasn’t predominantly euro-driven, but the result of much-improved sentiment towards the pound.
Economically, the situation in the UK remains extremely shaky. While April’s growth figures from the manufacturing, construction and services sectors were all encouraging and retail sales growth was staggeringly strong, the UK GDP figure for Q1 revealed a disappointing 0.2% contraction.
The market appears to be more than a little sceptical with regard to the ONS’s findings and will be looking for an upward revision to the GDP figure on 24 May. Regardless, the headlines surrounding a ‘double-dip recession’ are likely to weigh on consumer and business confidence alike.
UK suffers the double-dip
Whether or not the UK is indeed in a technical recession, UK growth will remain extremely weak in 2012. Disappointingly, Moody’s has recently placed doubt over the likelihood of any economic boost to the UK as a result of the London Olympics in the summer. The eurozone crisis continues to pose the greatest risk to the UK economy. As shown by the latest UK manufacturing figures, export orders are slowing and the eurozone’s economic contraction will undoubtedly drag on domestic activity.
The good news for sterling, however, is that its appeal is not based on economic growth potential. Sterling still represents a convenient alternative to investors looking to exit the euro but stay within Europe. Sterling is also a currency over which there is no threat of intervention looming (unlike the Japanese yen and the Swiss franc).
Despite the recent double-dip headlines, the UK government has reiterated its commitment to the austerity path, in order to maintain the faith of both the credit rating agencies and investors, thus keeping borrowing costs low. As a result, sterling’s ‘second tier’ safe-haven status has really come to the fore in the past few weeks and will provide plenty of support as the debt crisis rolls on.
MPC steps away from QE
Most importantly, sterling is now a currency over which there is perceived to be a reduced threat of quantitative easing, which contrasts particularly with the US dollar. The minutes from the MPC’s April meeting revealed that Adam Posen did not vote for additional QE, which took the market very much by surprise and left only David Miles as the solitary voter for additional monetary easing.
After a slight increase in UK inflation up to 3.5% in March, the MPC increased its medium-term inflation projections. The MPC’s apparent preoccupation with UK price pressures, over and above the state of UK growth, has seen bets on the likelihood of further QE from the BoE scaled back. With the MPC likely to remain in wait and see mode’ at its May meeting on 10 May, the pound has gone from strength to strength. Beyond this month though, there remain significant risks that the more pro-QE arguments will resurface to haunt the pound.
Downside risks to the euro
With regard to the single currency, events in the eurozone over recent weeks have certainly weighed on confidence, though not as much as one might expect. Growth data from Germany, France and the eurozone as a whole disappointed in April and another quarterly contraction is likely to be announced on 15 May. This will put the eurozone in the same boat as the UK - in technical recession. However, there’s no doubt the eurozone faces greater downside risks to growth than the UK moving forward and its recession is almost certain to continue through Q2.
Last month’s Spring IMF meeting failed to convince the markets that EU leaders have a proper handle on the EU’s ongoing crisis. The region’s ‘financial firewall’ has been bolstered by a further $430bn, which is a significant development. However, rating agency S&P has recently seen fit to downgrade eleven Spanish banks, which has seen Spanish and Italian 10-year bond yields make their way back up towards the dangerous 6.00% mark -a good bellwether of rising market tensions.
These rising tensions can largely be put down to fresh political concerns. 6 May brings the second and final round of the French presidential election. Nicholas Sarkozy is facing a likely defeat by Socialist candidate Francois Hollande, which places huge uncertainty over the EU’s Franco-German leadership, the EU’s fiscal compact and its ‘austerity first’ position.
Meanwhile in Greece, parliamentary elections threaten to prevent the country’s two leading pro-bailout parties from securing a majority, which again casts uncertainty over Greece’s bailout situation. In addition, the Dutch government’s collapse as a result of disagreements over austerity measures is telling of a growing political discontent across the region. There is a significant risk that the austerity backlash could spread to the UK local elections this week but the government is nonetheless unlikely to be derailed on its commitment to deficit-reduction.
GBP/EUR has climbed by over 2.50% in the past month, hitting fresh multi-month highs up to this week’s peak above €1.23 (the highest since July 2010). We are looking for further gains in the rate as conditions in the eurozone continue to deteriorate, with the €1.25 (80p) level representing the first key target.
GBP/USD
The US dollar remained soft in April, hemmed in by weaker US economic data and ongoing dovish rhetoric from US Federal Reserve Chairman Ben Bernanke. The monthly US jobs figure for March revealed that half as many jobs were added to the payrolls compared to February and US GDP data for the first quarter of 2012 came in at a disappointing 2.2% (annualised), against expectations of a 2.6% reading. Clearly the US economy is recovering at a far stronger pace than what we are seeing in the UK but it is the implications that this slower pace of growth (the US economy grew at a pace of 3.0% in Q4 2011) has with regard to the US Federal Reserve monetary policy.
The Fed was slightly brighter in its analysis of the US economy last month but is highly likely to remain in ‘wait and see mode’ for the foreseeable future. Bernanke has repeatedly put the brakes on any over-optimistic projections of US growth and has reminded the market that if the pace of US growth softens further from its current moderate pace and progress on the labour market issue stagnates, then QE3 is still very much on the table. Every time Bernanke emphasises the possibilities of QE3, the dollar sells off as risk appetite is boosted and investors chase higher yielding assets, such as the Australian dollar or stocks and shares.
The US dollar has found some favour in the past couple of sessions, helped by a stronger US manufacturing figure. However, a slide in the EUR/USD pair as a result of poor growth figures from the eurozone (Italy in particular) has proven more influential.
It has been difficult calling a top to the GBP/USD’s recent rally in the year to date. It must be said that with the recent poor UK growth figures in mind, doubts are likely to creep in with regard to the likelihood that the MPC will resist further QE this year. This may make this pair’s 8-month high of $1.63 a tough level to breach. We continue to anticipate that EUR/USD will fall through the $1.30 threshold this quarter and whilst sterling should hold up better against the dollar by comparison, a significant decline remains likely. Therefore, we are anticipating GBP/USD to ease back towards the $1.60 level, from the current rate below $1.62.
Richard Driver
Currency Analyst
Caxton FX
The Office of National Statistics (ONS) last week announced the disappointing news that the UK economy contracted by 0.2% in the first three months of 2012. Taken with Q4 2011’s 0.1% contraction, this latest GDP figure signalled the UK having entered a technical recession. Nonetheless, sterling continues to enjoy strong demand as circumstances worsen on the continent.
The US dollar is still struggling to capitalise on its economy’s comparative strength. US growth data has fallen off its impressive uptrend somewhat, as shown by April’s softer unemployment figures and the recent undershoot in the first quarter US GDP figure.
This has played into the hands of the more cautious members of the US Federal Reserve, including Chairman Ben Bernanke, who refuse to rule out the possibility of another round of US quantitative easing. The market is becoming increasingly obsessed with the Fed’s monetary policy outlook and ongoing QE3 speculation continues to hurt the dollar’s performance.
The eurozone’s debt and growth situation is looking no better and worryingly, perhaps as a result of this lack of progress, the eurozone has become embroiled in fresh political uncertainty. French President Nicholas Sarkozy, could well suffer electoral defeat on the 6 May, whilst Greece will be holding parliamentary elections on the same date. Both elections could have significant ramifications on the direction of eurozone debt crisis in the short and long-term.
GBP/EUR
April saw sterling finally break away from the €1.21 level that had proven so sticky in the year to date. News out of the eurozone has been distinctly negative of late but unusually, the latest direction in this pair wasn’t predominantly euro-driven, but the result of much-improved sentiment towards the pound.
Economically, the situation in the UK remains extremely shaky. While April’s growth figures from the manufacturing, construction and services sectors were all encouraging and retail sales growth was staggeringly strong, the UK GDP figure for Q1 revealed a disappointing 0.2% contraction.
The market appears to be more than a little sceptical with regard to the ONS’s findings and will be looking for an upward revision to the GDP figure on 24 May. Regardless, the headlines surrounding a ‘double-dip recession’ are likely to weigh on consumer and business confidence alike.
UK suffers the double-dip
Whether or not the UK is indeed in a technical recession, UK growth will remain extremely weak in 2012. Disappointingly, Moody’s has recently placed doubt over the likelihood of any economic boost to the UK as a result of the London Olympics in the summer. The eurozone crisis continues to pose the greatest risk to the UK economy. As shown by the latest UK manufacturing figures, export orders are slowing and the eurozone’s economic contraction will undoubtedly drag on domestic activity.
The good news for sterling, however, is that its appeal is not based on economic growth potential. Sterling still represents a convenient alternative to investors looking to exit the euro but stay within Europe. Sterling is also a currency over which there is no threat of intervention looming (unlike the Japanese yen and the Swiss franc).
Despite the recent double-dip headlines, the UK government has reiterated its commitment to the austerity path, in order to maintain the faith of both the credit rating agencies and investors, thus keeping borrowing costs low. As a result, sterling’s ‘second tier’ safe-haven status has really come to the fore in the past few weeks and will provide plenty of support as the debt crisis rolls on.
MPC steps away from QE
Most importantly, sterling is now a currency over which there is perceived to be a reduced threat of quantitative easing, which contrasts particularly with the US dollar. The minutes from the MPC’s April meeting revealed that Adam Posen did not vote for additional QE, which took the market very much by surprise and left only David Miles as the solitary voter for additional monetary easing.
After a slight increase in UK inflation up to 3.5% in March, the MPC increased its medium-term inflation projections. The MPC’s apparent preoccupation with UK price pressures, over and above the state of UK growth, has seen bets on the likelihood of further QE from the BoE scaled back. With the MPC likely to remain in wait and see mode’ at its May meeting on 10 May, the pound has gone from strength to strength. Beyond this month though, there remain significant risks that the more pro-QE arguments will resurface to haunt the pound.
Downside risks to the euro
With regard to the single currency, events in the eurozone over recent weeks have certainly weighed on confidence, though not as much as one might expect. Growth data from Germany, France and the eurozone as a whole disappointed in April and another quarterly contraction is likely to be announced on 15 May. This will put the eurozone in the same boat as the UK - in technical recession. However, there’s no doubt the eurozone faces greater downside risks to growth than the UK moving forward and its recession is almost certain to continue through Q2.
Last month’s Spring IMF meeting failed to convince the markets that EU leaders have a proper handle on the EU’s ongoing crisis. The region’s ‘financial firewall’ has been bolstered by a further $430bn, which is a significant development. However, rating agency S&P has recently seen fit to downgrade eleven Spanish banks, which has seen Spanish and Italian 10-year bond yields make their way back up towards the dangerous 6.00% mark -a good bellwether of rising market tensions.
These rising tensions can largely be put down to fresh political concerns. 6 May brings the second and final round of the French presidential election. Nicholas Sarkozy is facing a likely defeat by Socialist candidate Francois Hollande, which places huge uncertainty over the EU’s Franco-German leadership, the EU’s fiscal compact and its ‘austerity first’ position.
Meanwhile in Greece, parliamentary elections threaten to prevent the country’s two leading pro-bailout parties from securing a majority, which again casts uncertainty over Greece’s bailout situation. In addition, the Dutch government’s collapse as a result of disagreements over austerity measures is telling of a growing political discontent across the region. There is a significant risk that the austerity backlash could spread to the UK local elections this week but the government is nonetheless unlikely to be derailed on its commitment to deficit-reduction.
GBP/EUR has climbed by over 2.50% in the past month, hitting fresh multi-month highs up to this week’s peak above €1.23 (the highest since July 2010). We are looking for further gains in the rate as conditions in the eurozone continue to deteriorate, with the €1.25 (80p) level representing the first key target.
GBP/USD
The US dollar remained soft in April, hemmed in by weaker US economic data and ongoing dovish rhetoric from US Federal Reserve Chairman Ben Bernanke. The monthly US jobs figure for March revealed that half as many jobs were added to the payrolls compared to February and US GDP data for the first quarter of 2012 came in at a disappointing 2.2% (annualised), against expectations of a 2.6% reading. Clearly the US economy is recovering at a far stronger pace than what we are seeing in the UK but it is the implications that this slower pace of growth (the US economy grew at a pace of 3.0% in Q4 2011) has with regard to the US Federal Reserve monetary policy.
The Fed was slightly brighter in its analysis of the US economy last month but is highly likely to remain in ‘wait and see mode’ for the foreseeable future. Bernanke has repeatedly put the brakes on any over-optimistic projections of US growth and has reminded the market that if the pace of US growth softens further from its current moderate pace and progress on the labour market issue stagnates, then QE3 is still very much on the table. Every time Bernanke emphasises the possibilities of QE3, the dollar sells off as risk appetite is boosted and investors chase higher yielding assets, such as the Australian dollar or stocks and shares.
The US dollar has found some favour in the past couple of sessions, helped by a stronger US manufacturing figure. However, a slide in the EUR/USD pair as a result of poor growth figures from the eurozone (Italy in particular) has proven more influential.
It has been difficult calling a top to the GBP/USD’s recent rally in the year to date. It must be said that with the recent poor UK growth figures in mind, doubts are likely to creep in with regard to the likelihood that the MPC will resist further QE this year. This may make this pair’s 8-month high of $1.63 a tough level to breach. We continue to anticipate that EUR/USD will fall through the $1.30 threshold this quarter and whilst sterling should hold up better against the dollar by comparison, a significant decline remains likely. Therefore, we are anticipating GBP/USD to ease back towards the $1.60 level, from the current rate below $1.62.
Richard Driver
Currency Analyst
Caxton FX
Monday, 30 April 2012
Euro vulnerable ahead of crucial eurozone elections
UK enters a technical recession but sterling still flying high
The preliminary reading of the UK’s Q1 GDP figure came in last week to reveal a 0.2% contraction, which triggered a wave of headlines regarding the UK economy having entered a double-dip recession. Still though, the pound is on the offensive across the board, which is really a reflection of its growing safe-haven demand.
There is widespread scepticism with regard to the latest GDP figure and many, including us, are expecting an upward revision towards the end of May. What’s more, the figure does little to change the Bank of England’s monetary policy outlook as the MPC had already recognized the risks of Q1 contraction and appear confident that growth will pick up this year. The UK government’s response has been to reaffirm its unwavering commitment to keep the UK’s international borrowing costs low through ongoing austerity measures - a popular stance with the market.
The UK’s monthly set of growth figures will roll out over the next few days and readings of the manufacturing, construction and services sector are expected to show a slowdown. Judging by the performance of sterling in the past fortnight though, next Thursday’s BoE quantitative easing decision represents the next major domestic risk event. The MPC is likely to remain in wait and see mode next week, regardless of the UK’s economic slump in the past three months.
US growth slows down to strengthen Bernanke’s dovish position
The first quarter US GDP figure came in at 2.2% (annualized) last week, well below the 2.6% reading that was anticipated. Whilst clearly outpacing the UK economy, this slowdown is playing into the hands of the more dovish members of the US Federal Reserve, particularly Chairman Ben Bernanke. Bernanke stated that US monetary policy is “more or less in the right place” at the moment and interest rate hikes aren’t expected for at least another couple of years. However, Bernanke has once again emphasized that the door remains well and truly open to a third round of quantitative easing and it is this factor that continues to hurt the US dollar.
This Friday brings the monthly US non-farm payrolls figure, the most important indicator of growth in the world’s leading economy. A weaker number is expected, so it is unlikely that the US dollar, in the short-term, will return to strength on the basis of domestic economic strength. However, the US dollar will remain a safe-haven target if eurozone nerves jangle again, as they may well do as the weekend approaches.
French and Greek elections come into focus
Eurozone jitters are likely to increase ahead of the weekend’s final French and Greek elections. Sarkozy’s rival Hollande is looking favourite to win the French presidential election, while there is chance that Greece’s two major parties (the current coalition) will fail to secure a majority. Amid this huge political uncertainty, we may well see the euro struggle this week.
Sterling is trading up towards €1.23 this week, which is the result of a 2.5% climb for this pair in the past month. Further gains for GBP/EUR look probable. Sterling is trading marginally off an eight-month high of $1.63, which is still an excellent level at which to purchase USD. There may be room for a little more upside in the short-term but a weaker EUR/USD should eventually drag on GBP/USD.
End of week forecast
GBP / EUR 1.24
GBP / USD 1.6350
EUR / USD 1.31
GBP / AUD 1.57
Richard Driver
Currency Analyst
Caxton FX
The preliminary reading of the UK’s Q1 GDP figure came in last week to reveal a 0.2% contraction, which triggered a wave of headlines regarding the UK economy having entered a double-dip recession. Still though, the pound is on the offensive across the board, which is really a reflection of its growing safe-haven demand.
There is widespread scepticism with regard to the latest GDP figure and many, including us, are expecting an upward revision towards the end of May. What’s more, the figure does little to change the Bank of England’s monetary policy outlook as the MPC had already recognized the risks of Q1 contraction and appear confident that growth will pick up this year. The UK government’s response has been to reaffirm its unwavering commitment to keep the UK’s international borrowing costs low through ongoing austerity measures - a popular stance with the market.
The UK’s monthly set of growth figures will roll out over the next few days and readings of the manufacturing, construction and services sector are expected to show a slowdown. Judging by the performance of sterling in the past fortnight though, next Thursday’s BoE quantitative easing decision represents the next major domestic risk event. The MPC is likely to remain in wait and see mode next week, regardless of the UK’s economic slump in the past three months.
US growth slows down to strengthen Bernanke’s dovish position
The first quarter US GDP figure came in at 2.2% (annualized) last week, well below the 2.6% reading that was anticipated. Whilst clearly outpacing the UK economy, this slowdown is playing into the hands of the more dovish members of the US Federal Reserve, particularly Chairman Ben Bernanke. Bernanke stated that US monetary policy is “more or less in the right place” at the moment and interest rate hikes aren’t expected for at least another couple of years. However, Bernanke has once again emphasized that the door remains well and truly open to a third round of quantitative easing and it is this factor that continues to hurt the US dollar.
This Friday brings the monthly US non-farm payrolls figure, the most important indicator of growth in the world’s leading economy. A weaker number is expected, so it is unlikely that the US dollar, in the short-term, will return to strength on the basis of domestic economic strength. However, the US dollar will remain a safe-haven target if eurozone nerves jangle again, as they may well do as the weekend approaches.
French and Greek elections come into focus
Eurozone jitters are likely to increase ahead of the weekend’s final French and Greek elections. Sarkozy’s rival Hollande is looking favourite to win the French presidential election, while there is chance that Greece’s two major parties (the current coalition) will fail to secure a majority. Amid this huge political uncertainty, we may well see the euro struggle this week.
Sterling is trading up towards €1.23 this week, which is the result of a 2.5% climb for this pair in the past month. Further gains for GBP/EUR look probable. Sterling is trading marginally off an eight-month high of $1.63, which is still an excellent level at which to purchase USD. There may be room for a little more upside in the short-term but a weaker EUR/USD should eventually drag on GBP/USD.
End of week forecast
GBP / EUR 1.24
GBP / USD 1.6350
EUR / USD 1.31
GBP / AUD 1.57
Richard Driver
Currency Analyst
Caxton FX
Tuesday, 24 April 2012
Caxton FX Weekly Round-up: Sterling Rallies
IMF boost emergency fund by $430bn but EUR remains pressurized
The weekend’s IMF and G20 meetings produced some real progress in the form of a combined $430bn of additional loans, to be used in the event of a deterioration of the eurozone debt crisis. Good news then, but Spanish 10-year bond yields are trading around the dangerous 6.00% level, and Italy’s equivalent debt is yielding 5.75% today, so it clear that the market remains characteristically skeptical.
The French presidential elections have increased the pressure being felt by the euro in recent sessions. Socialist candidate Francois Hollande received the most votes in the weekend’s initial round of voting and the euro, as well as European equities, has declined as a result. The final election will be held on May 6th and this political uncertainty is likely to weigh on the single currency in the meantime. The markets would probably prefer Sarkozy to remain in power, thus reducing the risk of a breakdown in cooperation between France and Germany on dealing with the debt crisis. Fresh concerns have also sprung up with respect to the Netherlands, which is likely to hold elections in light of the government’s collapse after failing to agree measures to slash its budget deficit.
As well as the weekend’s political concerns, the markets have had to digest some further disappointing eurozone economic data. A German manufacturing growth figure hit almost a three year low and figures out of the eurozone as a whole were equally alarming.
MPC's Posen gives sterling a boost
Sterling enjoyed a staggeringly strong week last week and has started the current one where it left off. MPC policymaker Adam Posen provided the main catalyst for the rally, with the minutes from the MPC’s April meeting revealing that he did not vote for further quantitative easing. The market may have got ahead of itself in pricing out the likelihood of further BoE quantitative easing. Posen may well have voted for no change due to the recent uptick in inflation and may have just preferred to see the current round of QE run its course (which it will have done by time of the MPC’s next meeting in early May). More monetary easing from the BoE is still a distinct possibility if UK inflation eases in the second half of the year and economic growth remains stagnant.
UK Q1 GDP figure to show some growth, albeit scant
Wednesday brings the release of the first quarter UK GDP figure. After last week’s excellent UK retail sales figure, we are fairly confident that we will not see another quarterly contraction. Estimates are falling around the 0.1% growth level, which is indicative of the uncertain footing from which the UK economy is building. Nonetheless, news that the UK has avoided a technical recession will be welcome (though the risks of disappointment are not insignificant).
Sterling is trading at almost a six-month high of $1.6150 at present and we continue to view these to be excellent levels at which to sell the pound. The Fed is likely to be more hawkish in its communiqué this week, whilst the US GDP figure is also likely to be impressive, which could well help the US dollar bounce back. Sterling is trading at almost a two-year high against the euro above €1.2250 and further gains are looking likely, though we may see upward progress stall as nerves kick in ahead of Wednesday’s GDP figure.
End of week forecast
GBP / EUR 1.23
GBP / USD 1.6050
EUR / USD 1.3050
GBP / AUD 1.5750
Richard Driver
Currency Analyst
Caxton FX
The weekend’s IMF and G20 meetings produced some real progress in the form of a combined $430bn of additional loans, to be used in the event of a deterioration of the eurozone debt crisis. Good news then, but Spanish 10-year bond yields are trading around the dangerous 6.00% level, and Italy’s equivalent debt is yielding 5.75% today, so it clear that the market remains characteristically skeptical.
The French presidential elections have increased the pressure being felt by the euro in recent sessions. Socialist candidate Francois Hollande received the most votes in the weekend’s initial round of voting and the euro, as well as European equities, has declined as a result. The final election will be held on May 6th and this political uncertainty is likely to weigh on the single currency in the meantime. The markets would probably prefer Sarkozy to remain in power, thus reducing the risk of a breakdown in cooperation between France and Germany on dealing with the debt crisis. Fresh concerns have also sprung up with respect to the Netherlands, which is likely to hold elections in light of the government’s collapse after failing to agree measures to slash its budget deficit.
As well as the weekend’s political concerns, the markets have had to digest some further disappointing eurozone economic data. A German manufacturing growth figure hit almost a three year low and figures out of the eurozone as a whole were equally alarming.
MPC's Posen gives sterling a boost
Sterling enjoyed a staggeringly strong week last week and has started the current one where it left off. MPC policymaker Adam Posen provided the main catalyst for the rally, with the minutes from the MPC’s April meeting revealing that he did not vote for further quantitative easing. The market may have got ahead of itself in pricing out the likelihood of further BoE quantitative easing. Posen may well have voted for no change due to the recent uptick in inflation and may have just preferred to see the current round of QE run its course (which it will have done by time of the MPC’s next meeting in early May). More monetary easing from the BoE is still a distinct possibility if UK inflation eases in the second half of the year and economic growth remains stagnant.
UK Q1 GDP figure to show some growth, albeit scant
Wednesday brings the release of the first quarter UK GDP figure. After last week’s excellent UK retail sales figure, we are fairly confident that we will not see another quarterly contraction. Estimates are falling around the 0.1% growth level, which is indicative of the uncertain footing from which the UK economy is building. Nonetheless, news that the UK has avoided a technical recession will be welcome (though the risks of disappointment are not insignificant).
Sterling is trading at almost a six-month high of $1.6150 at present and we continue to view these to be excellent levels at which to sell the pound. The Fed is likely to be more hawkish in its communiqué this week, whilst the US GDP figure is also likely to be impressive, which could well help the US dollar bounce back. Sterling is trading at almost a two-year high against the euro above €1.2250 and further gains are looking likely, though we may see upward progress stall as nerves kick in ahead of Wednesday’s GDP figure.
End of week forecast
GBP / EUR 1.23
GBP / USD 1.6050
EUR / USD 1.3050
GBP / AUD 1.5750
Richard Driver
Currency Analyst
Caxton FX
Friday, 20 April 2012
Less Dovish MPC Minutes Give Sterling a Major Boost
The recent release of the MPC minutes has given the pound an excellent boost. Adam Posen, the policymaker who has so often stood alone as the Bank of England’s arch dove, has seemingly abandoned his quest for further quantitative easing. Two votes became one in the MPC’s April meeting then, with only David Miles seeing fit to vote for a further £25bn in asset-purchases, though he stressed the decision was “finely balanced.”
The last quarterly inflation report assumed a fairly steady downtrend in UK inflation but the MPC is now noting higher medium-term inflation risks, which reduces the attractiveness of further QE. Higher inflation requires tighter monetary policy. For David Miles, the threat of a third consecutive decline in UK growth and another technical recession looms too large and he voted for extra £25bn of QE accordingly. Clearly, next week’s Q1 UK GDP figure will be crucial and the risks of another negative reading are not insignificant. However, April’s PMI surveys from the UK’s manufacturing, construction and services sectors were very encouraging and the recent UK labour statistics also provide room for optimism. The recent UK retail sales figure, which revealed stunning 1.8% growth in March, should ensure a positive GDP number on April 25th.
The BoE does appear to be moving away further monetary easing at present but the UK economy remains distinctly fragile. Many market players will be assuming further QE is now off the table but if inflation eases towards the end of the year and growth remains weak, dovish arguments will once again come to the fore. What’s more, the eurozone debt crisis could force the BoE’s hand if the situation in Spain and Italy deteriorates rapidly.
There is also the issue of Adam Posen’s thinking – whether he has really given up on more asset-purchases. Posen has indicated that he merely saw fit to let the current round of QE run its course. Posen will be able to reassess the need for a top-up in May, by which time the BoE’s inflation projections will have been formally updated and we will know whether the British economy has suffered the dreaded ‘double-dip.’ Only time will tell on this issue, but it’s fair to say the market may have jumped the gun in respect to Posen’s ‘change of stance.’ Our bet is that we will see Posen vote for more QE before the end of 2012.
Regardless, the majority of the MPC appear far too concerned with upside risks to inflation, and perhaps with preserving the BoE’s credibility on the issue of maintaining price stability, to step up QE at its next meeting in May or any time soon.
Whilst sterling’s safe-haven status has enabled it to weather the constant threat of QE hanging over it, it has undoubtedly weighed on demand in recent months. Sterling has now been freed up to rally in the aftermath of the minutes, climbing to a 20-month high against the euro and a six month high against the US dollar. Even higher levels will be seen against an increasingly weak single currency, though we maintain a negative outlook for the pound against the US dollar.
Richard Driver
Currency Anlayst
Caxton FX
The last quarterly inflation report assumed a fairly steady downtrend in UK inflation but the MPC is now noting higher medium-term inflation risks, which reduces the attractiveness of further QE. Higher inflation requires tighter monetary policy. For David Miles, the threat of a third consecutive decline in UK growth and another technical recession looms too large and he voted for extra £25bn of QE accordingly. Clearly, next week’s Q1 UK GDP figure will be crucial and the risks of another negative reading are not insignificant. However, April’s PMI surveys from the UK’s manufacturing, construction and services sectors were very encouraging and the recent UK labour statistics also provide room for optimism. The recent UK retail sales figure, which revealed stunning 1.8% growth in March, should ensure a positive GDP number on April 25th.
The BoE does appear to be moving away further monetary easing at present but the UK economy remains distinctly fragile. Many market players will be assuming further QE is now off the table but if inflation eases towards the end of the year and growth remains weak, dovish arguments will once again come to the fore. What’s more, the eurozone debt crisis could force the BoE’s hand if the situation in Spain and Italy deteriorates rapidly.
There is also the issue of Adam Posen’s thinking – whether he has really given up on more asset-purchases. Posen has indicated that he merely saw fit to let the current round of QE run its course. Posen will be able to reassess the need for a top-up in May, by which time the BoE’s inflation projections will have been formally updated and we will know whether the British economy has suffered the dreaded ‘double-dip.’ Only time will tell on this issue, but it’s fair to say the market may have jumped the gun in respect to Posen’s ‘change of stance.’ Our bet is that we will see Posen vote for more QE before the end of 2012.
Regardless, the majority of the MPC appear far too concerned with upside risks to inflation, and perhaps with preserving the BoE’s credibility on the issue of maintaining price stability, to step up QE at its next meeting in May or any time soon.
Whilst sterling’s safe-haven status has enabled it to weather the constant threat of QE hanging over it, it has undoubtedly weighed on demand in recent months. Sterling has now been freed up to rally in the aftermath of the minutes, climbing to a 20-month high against the euro and a six month high against the US dollar. Even higher levels will be seen against an increasingly weak single currency, though we maintain a negative outlook for the pound against the US dollar.
Richard Driver
Currency Anlayst
Caxton FX
Tuesday, 10 April 2012
Rising Spanish bond yields highlight market nerves
UK services sector growth suggests no UK double-dip recession
In addition to last week’s strong March growth figures from the UK manufacturing and construction sectors, the services sector joined the party by coming in well above forecasts as well. This probably means that the UK has avoided a entering a technical recession (two consecutive quarters of negative growth), albeit by what is likely to be just the narrowest of margins. Indeed contrary to the OECD’s forecasts, this is what the NIESR have argued in the past week (0.1% growth in Q1).
A second gauge of the UK manufacturing sector was more disappointing last week and has taken the edge off some of the positive sentiment surrounding the UK economy. It certainly is true that this sector has underperformed badly in the past six months and needs to pick up if the UK’s fledging recovery is to pick up any pace. The services sector cannot be the sole source of growth. In terms of important growth figures coming up this month, the 24th April preliminary Q1 GDP figure is the real focus, though next week brings the release of the MPC meeting minutes, as well as the monthly updates from the UK labor market and the retail sector.
US Non-farm payrolls disappoint but no need to panic
Last Friday’s key monthly update from the US labour market revealed that half as many jobs (120k) were added in March, compared to February’s showing. This gives credence to Ben Bernanke’s refusal celebrate the US recovery from the financial crisis. The coming week is noticeably quieter on the data front, with Friday afternoon’s US consumer sentiment figure (forecast to improve) likely to be a highlight.
The dollar struggled a little on the back of Friday’s US jobs figure but it has since recovered. This data will encourage greater caution in the market but it alone won’t trigger large scale revisions of US dollar bets. Global stocks and commodity prices are in decline at present, which is keeping the safe-haven dollar in pretty robust demand, though it is having to wait for significant gains against the pound.
Spanish bond yields on the rise
Nerves surrounding the Spanish and overall eurozone debt situation are clearly on the rise, as shown by the general risk-off tone to present trading conditions. Spain’s Economy Minister today refused to rule out the need for a Spanish financial rescue. PM Rajoy has announced a further €10bn of budget cuts but as Spanish 10-year bond yields climb towards 6.0%, it is evident that market nerves are on the up.
If concerns continue to heat up, the ECB may be persuaded to cut interest rates again to restore sentiment, which is unlikely to be euro-positive. At the very least, an exit from the ECB’s current liquidity measures (monetary easing) is unlikely to come soon; Draghi indicated as much last week. The euro looks poised for a move lower.
Sterling was the third best performing currency against the US dollar in the first quarter of 2012 and it continues to hold up pretty well. GBP/USD’s current levels of $1.5850 remain a good level at which to buy US dollars. Against the euro, sterling is also performing very well. GBP/EUR is trading not too far away from a 19-month high, though it could suffer a short-term downward correction if it fails to push higher from here.
End of week forecast
GBP / EUR 1.2050
GBP / USD 1.5750
EUR / USD 1.3025
GBP / AUD 1.5550
Richard Driver
Currency Analyst
Caxton FX
In addition to last week’s strong March growth figures from the UK manufacturing and construction sectors, the services sector joined the party by coming in well above forecasts as well. This probably means that the UK has avoided a entering a technical recession (two consecutive quarters of negative growth), albeit by what is likely to be just the narrowest of margins. Indeed contrary to the OECD’s forecasts, this is what the NIESR have argued in the past week (0.1% growth in Q1).
A second gauge of the UK manufacturing sector was more disappointing last week and has taken the edge off some of the positive sentiment surrounding the UK economy. It certainly is true that this sector has underperformed badly in the past six months and needs to pick up if the UK’s fledging recovery is to pick up any pace. The services sector cannot be the sole source of growth. In terms of important growth figures coming up this month, the 24th April preliminary Q1 GDP figure is the real focus, though next week brings the release of the MPC meeting minutes, as well as the monthly updates from the UK labor market and the retail sector.
US Non-farm payrolls disappoint but no need to panic
Last Friday’s key monthly update from the US labour market revealed that half as many jobs (120k) were added in March, compared to February’s showing. This gives credence to Ben Bernanke’s refusal celebrate the US recovery from the financial crisis. The coming week is noticeably quieter on the data front, with Friday afternoon’s US consumer sentiment figure (forecast to improve) likely to be a highlight.
The dollar struggled a little on the back of Friday’s US jobs figure but it has since recovered. This data will encourage greater caution in the market but it alone won’t trigger large scale revisions of US dollar bets. Global stocks and commodity prices are in decline at present, which is keeping the safe-haven dollar in pretty robust demand, though it is having to wait for significant gains against the pound.
Spanish bond yields on the rise
Nerves surrounding the Spanish and overall eurozone debt situation are clearly on the rise, as shown by the general risk-off tone to present trading conditions. Spain’s Economy Minister today refused to rule out the need for a Spanish financial rescue. PM Rajoy has announced a further €10bn of budget cuts but as Spanish 10-year bond yields climb towards 6.0%, it is evident that market nerves are on the up.
If concerns continue to heat up, the ECB may be persuaded to cut interest rates again to restore sentiment, which is unlikely to be euro-positive. At the very least, an exit from the ECB’s current liquidity measures (monetary easing) is unlikely to come soon; Draghi indicated as much last week. The euro looks poised for a move lower.
Sterling was the third best performing currency against the US dollar in the first quarter of 2012 and it continues to hold up pretty well. GBP/USD’s current levels of $1.5850 remain a good level at which to buy US dollars. Against the euro, sterling is also performing very well. GBP/EUR is trading not too far away from a 19-month high, though it could suffer a short-term downward correction if it fails to push higher from here.
End of week forecast
GBP / EUR 1.2050
GBP / USD 1.5750
EUR / USD 1.3025
GBP / AUD 1.5550
Richard Driver
Currency Analyst
Caxton FX
Tuesday, 27 March 2012
Weekly Round-Up: Bernanke sparks more hopes for QE3
Bernanke unimpressed by US upturn
The upturn we have seen in the US economy has peppered the financial headlines over the past few months. The US grew at an annualized pace of 3.0% in the further quarter of 2011, a figure which could well be revised upwards on Thursday. When the first quarter 2012 GDP figure emerges, this pace of growth is likely to have increased.
Nonetheless, US Federal Reserve Chairman Ben Bernanke remains distinctly cautious in his analysis of the US recovery. In a speech on Monday, Bernanke acknowledged that US data has been positive but refused to describe it as impressive. The US economy enjoyed similarly positive starts to 2010 and 2011 and failed to kick on, which may explain the Fed Chairman’s more guarded approach. The market seems to need little encouragement to jump on dovish rhetoric from the Fed and speculation as to QE3 has been reignited this week as a result.
There have been some increasingly hawkish comments from some US Federal Reserve Policymakers but Bernanke’s ever-dovish remarks have kept the greenback very much hemmed in. He will certainly take more convincing before QE3 is truly taken off the table. We believe the Fed is very much in wait and see mode and prepared to pull the trigger on QE3 should conditions worsen significantly, whilst we do not view the central bank to be close to doing so at present.
Today’s session brings a key US consumer confidence figure and the aforementioned revised US GDP figure will be announced on Thursday. If the dollar is to bounce back in the near-term, these figures really need to be positive.
The dollar’s recent poor performance does little to change our position that 2012 will be a strong year for the greenback, as the US economic divergence with the slowdown being seen across other major global economies takes effect.
Two MPC members vote for further QE and retail sector disappoints
Last week’s MPC minutes revealed that two members voted for a further increase to the Bank of England’s quantitative easing programme. The increased possibility of further QE in the UK is never going to be positive for GBP but as it has done in the last few months, it weathered the news well.
The two MPC doves, Miles and Posen, may have felt vindicated by last week’s poor UK retail sales, which undershot expectations to show a 0.8% monthly contraction. Nonetheless, the retail number was expected to be pretty soft after such a strong start to the year and again sterling recovered.
Elsewhere, eurozone growth data was very disappointing last week. Manufacturing and services figures for Germany, France and the eurozone as a whole all undershot expectations. This only firms our bet that the eurozone has entered what is likely to be a deep and painful recession.
Sterling is trading just below the psychological $1.60 level today, having recently found resistance at this key level. Whilst there is now a significant risk this level will be breached, we are still betting sterling will stall. Against the euro, sterling is well-supported in the €1.1950-€1.20 area, though it may require some strong UK growth figures at the beginning of next month for sterling to push much higher.
End of week forecast
GBP / EUR 1.20
GBP / USD 1.59
EUR / USD 1.3250
GBP / AUD 1.5250
Richard Driver
Currency Analyst
Caxton FX
The upturn we have seen in the US economy has peppered the financial headlines over the past few months. The US grew at an annualized pace of 3.0% in the further quarter of 2011, a figure which could well be revised upwards on Thursday. When the first quarter 2012 GDP figure emerges, this pace of growth is likely to have increased.
Nonetheless, US Federal Reserve Chairman Ben Bernanke remains distinctly cautious in his analysis of the US recovery. In a speech on Monday, Bernanke acknowledged that US data has been positive but refused to describe it as impressive. The US economy enjoyed similarly positive starts to 2010 and 2011 and failed to kick on, which may explain the Fed Chairman’s more guarded approach. The market seems to need little encouragement to jump on dovish rhetoric from the Fed and speculation as to QE3 has been reignited this week as a result.
There have been some increasingly hawkish comments from some US Federal Reserve Policymakers but Bernanke’s ever-dovish remarks have kept the greenback very much hemmed in. He will certainly take more convincing before QE3 is truly taken off the table. We believe the Fed is very much in wait and see mode and prepared to pull the trigger on QE3 should conditions worsen significantly, whilst we do not view the central bank to be close to doing so at present.
Today’s session brings a key US consumer confidence figure and the aforementioned revised US GDP figure will be announced on Thursday. If the dollar is to bounce back in the near-term, these figures really need to be positive.
The dollar’s recent poor performance does little to change our position that 2012 will be a strong year for the greenback, as the US economic divergence with the slowdown being seen across other major global economies takes effect.
Two MPC members vote for further QE and retail sector disappoints
Last week’s MPC minutes revealed that two members voted for a further increase to the Bank of England’s quantitative easing programme. The increased possibility of further QE in the UK is never going to be positive for GBP but as it has done in the last few months, it weathered the news well.
The two MPC doves, Miles and Posen, may have felt vindicated by last week’s poor UK retail sales, which undershot expectations to show a 0.8% monthly contraction. Nonetheless, the retail number was expected to be pretty soft after such a strong start to the year and again sterling recovered.
Elsewhere, eurozone growth data was very disappointing last week. Manufacturing and services figures for Germany, France and the eurozone as a whole all undershot expectations. This only firms our bet that the eurozone has entered what is likely to be a deep and painful recession.
Sterling is trading just below the psychological $1.60 level today, having recently found resistance at this key level. Whilst there is now a significant risk this level will be breached, we are still betting sterling will stall. Against the euro, sterling is well-supported in the €1.1950-€1.20 area, though it may require some strong UK growth figures at the beginning of next month for sterling to push much higher.
End of week forecast
GBP / EUR 1.20
GBP / USD 1.59
EUR / USD 1.3250
GBP / AUD 1.5250
Richard Driver
Currency Analyst
Caxton FX
Tuesday, 20 March 2012
Caxton FX Weekly Round-up: MPC minutes and UK budget in focus
Dollar struggling to sustain the gains that data would indicate
The US dollar has recently posted ten and eighteen-day low against both the euro and the pound respectively. This belies the excellent growth data that has been surfacing from the US throughout March.
The highlights from last week included some strong US retail sales numbers, a positive US bank stress test result and some further impressive US manufacturing growth figures. The dollar sold-off on Friday however, largely a as a result of the softer-than-expected US inflation figure, which caused some players to revise their bets on the likelihood of ‘QE3’ from the US Federal Reserve.
Fed Chairman has indicated that QE3 is unlikely to be adopted and we maintain this view, which should aid the dollar this year. As the Fed’s Dudley reminded us yesterday, this is all contingent on the maintenance of the uptrend we are seeing in the US economy. Despite Friday’s poor US consumer confidence figure, there is little need to revise our bullish expectations for US GDP in 2012.
MPC minutes and UK annual budget comes into view
Bouncing back from last week’s poor UK unemployment figures and Fitch’s downgrade to the UK’s rating outlook, the pound has made an excellent start to the week. Taken against a basket of 13 major currencies, GBP is trading at its strongest level in over a year. However, the release of the minutes from the Monetary Policy Committee’s March meeting represents a risk event for the pound.
The impact of the minutes on the pound will be dictated by the tone struck with regard to the UK economy and the voting pattern with regard to increasing the Bank of England’s ongoing quantitative easing programme. Today’s UK inflation data revealed a further decline in price pressures to 3.4% (y/y), which highlights the scope for further QE should the MPC feel it necessary. King has indicated that enough QE has been done but the uncertain outlook for the UK economy will certainly keep UK data (such as Thursday’s UK retail sales figure) in focus in the coming months. Nonetheless, the slight uptrend in UK growth should improve the chances of a less dovish, sterling-positive MPC minutes release.
The UK Annual Budget announcement from Chancellor George Osborne will also be eyed closely on Wednesday lunchtime. In light of Fitch’s warning that the UK could lose its coveted AAA credit rating, Osborne is likely to ‘stick to his guns’ with regard to his austerity programme.
GBP may benefit from some support if Osborne can convince the markets that he can fuel UK growth amid ongoing belt-tightening. While significant domestically, there may well have to be some major headlines out of Osborne’s budget in order to cause much of a stir in the currency markets.
Sterling made another attempt at the $1.60 level on Monday but once again fell short, which could signal another move lower for GBP/USD, which currently trades just below $1.59. Against the euro, sterling is trading firmly around €1.20, though once again progress is stalling at these levels close to multi-month highs. With eurozone growth data likely to be weak on Thursday, we continue to look for stronger GBP/EUR levels and lower GBP/USD levels.
End of week forecast
GBP / EUR 1.2075
GBP / USD 1.5675
EUR / USD 1.31
GBP / AUD 1.5250
Richard Driver
Currency Analyst
Caxton FX
The US dollar has recently posted ten and eighteen-day low against both the euro and the pound respectively. This belies the excellent growth data that has been surfacing from the US throughout March.
The highlights from last week included some strong US retail sales numbers, a positive US bank stress test result and some further impressive US manufacturing growth figures. The dollar sold-off on Friday however, largely a as a result of the softer-than-expected US inflation figure, which caused some players to revise their bets on the likelihood of ‘QE3’ from the US Federal Reserve.
Fed Chairman has indicated that QE3 is unlikely to be adopted and we maintain this view, which should aid the dollar this year. As the Fed’s Dudley reminded us yesterday, this is all contingent on the maintenance of the uptrend we are seeing in the US economy. Despite Friday’s poor US consumer confidence figure, there is little need to revise our bullish expectations for US GDP in 2012.
MPC minutes and UK annual budget comes into view
Bouncing back from last week’s poor UK unemployment figures and Fitch’s downgrade to the UK’s rating outlook, the pound has made an excellent start to the week. Taken against a basket of 13 major currencies, GBP is trading at its strongest level in over a year. However, the release of the minutes from the Monetary Policy Committee’s March meeting represents a risk event for the pound.
The impact of the minutes on the pound will be dictated by the tone struck with regard to the UK economy and the voting pattern with regard to increasing the Bank of England’s ongoing quantitative easing programme. Today’s UK inflation data revealed a further decline in price pressures to 3.4% (y/y), which highlights the scope for further QE should the MPC feel it necessary. King has indicated that enough QE has been done but the uncertain outlook for the UK economy will certainly keep UK data (such as Thursday’s UK retail sales figure) in focus in the coming months. Nonetheless, the slight uptrend in UK growth should improve the chances of a less dovish, sterling-positive MPC minutes release.
The UK Annual Budget announcement from Chancellor George Osborne will also be eyed closely on Wednesday lunchtime. In light of Fitch’s warning that the UK could lose its coveted AAA credit rating, Osborne is likely to ‘stick to his guns’ with regard to his austerity programme.
GBP may benefit from some support if Osborne can convince the markets that he can fuel UK growth amid ongoing belt-tightening. While significant domestically, there may well have to be some major headlines out of Osborne’s budget in order to cause much of a stir in the currency markets.
Sterling made another attempt at the $1.60 level on Monday but once again fell short, which could signal another move lower for GBP/USD, which currently trades just below $1.59. Against the euro, sterling is trading firmly around €1.20, though once again progress is stalling at these levels close to multi-month highs. With eurozone growth data likely to be weak on Thursday, we continue to look for stronger GBP/EUR levels and lower GBP/USD levels.
End of week forecast
GBP / EUR 1.2075
GBP / USD 1.5675
EUR / USD 1.31
GBP / AUD 1.5250
Richard Driver
Currency Analyst
Caxton FX
Thursday, 15 March 2012
NOK/JPY Overview and Outlook for 2012
The Norwegian krone has made an extremely impressive start to 2012. It was the top performing currency in February, which is largely due to a combination of domestic economic strength and soaring oil prices.
Amid worrying developments in Iran, the price of Brent crude oil is trading at what is more than a three year high of $126 per barrel, which represents a 15% climb since the start of the year. As a major producer of oil, the Norwegian economy stands to benefit and by association so too does its currency.
On a domestic level, Norwegian manufacturing and retail sector growth and declining unemployment has improved sentiment towards the NOK, while a widening trade surplus shows that its export sector is not being hit by the eurozone downturn as other economies are. The Norwegian economy grew by an impressive 0.6% in the fourth quarter of 2011 and forward looking surveys are pointing towards a quicker pace of growth in 2012. Amid rising investment in Norway’s oil and gas sector, growth seems firmly underpinned while other global economies face a very uncertain year. As such, Norway’s stable, AAA-rated economy has seen the krone take on the role of something of a safe-haven currency so far this year.
The only real question mark hanging over the Norwegian krone is the monetary policy of the Norges Bank. The state of Norwegian economic growth wouldn’t suggest the need for interest rate cuts but that is what we have seen this week. The Norges Bank has surprisingly followed its December rate cut of 0.50% with a further 0.25% cut. With the Norwegian base rate currently standing at 1.25%, the krone’s interest rate differential has clearly been heavily reduced. More significantly though, the move suggests that the Norges Bank is very concerned with the appreciation we have seen in the Norwegian krone. A further cut to the base rate this year cannot be discounted.
Despite the NOK’s minor sell-off in response to the Norges Bank’s move this week, NOK/JPY has climbed by over 14% from January’s lows of 12.65, to its current level of 14.45. High oil prices and strong growth are likely to sustain demand for the NOK moving forward. The Norges Bank’s discomfort with the krone’s appreciation will slow the pace of this pair’s climb (and regardless, it is highly unlikely that the yen can also maintain its current pace of depreciation). Nonetheless, NOK/JPY should see gains past 16.00 in the second half of this year.
Richard Driver
Currency Analyst
Caxton FX
Amid worrying developments in Iran, the price of Brent crude oil is trading at what is more than a three year high of $126 per barrel, which represents a 15% climb since the start of the year. As a major producer of oil, the Norwegian economy stands to benefit and by association so too does its currency.
On a domestic level, Norwegian manufacturing and retail sector growth and declining unemployment has improved sentiment towards the NOK, while a widening trade surplus shows that its export sector is not being hit by the eurozone downturn as other economies are. The Norwegian economy grew by an impressive 0.6% in the fourth quarter of 2011 and forward looking surveys are pointing towards a quicker pace of growth in 2012. Amid rising investment in Norway’s oil and gas sector, growth seems firmly underpinned while other global economies face a very uncertain year. As such, Norway’s stable, AAA-rated economy has seen the krone take on the role of something of a safe-haven currency so far this year.
The only real question mark hanging over the Norwegian krone is the monetary policy of the Norges Bank. The state of Norwegian economic growth wouldn’t suggest the need for interest rate cuts but that is what we have seen this week. The Norges Bank has surprisingly followed its December rate cut of 0.50% with a further 0.25% cut. With the Norwegian base rate currently standing at 1.25%, the krone’s interest rate differential has clearly been heavily reduced. More significantly though, the move suggests that the Norges Bank is very concerned with the appreciation we have seen in the Norwegian krone. A further cut to the base rate this year cannot be discounted.
Despite the NOK’s minor sell-off in response to the Norges Bank’s move this week, NOK/JPY has climbed by over 14% from January’s lows of 12.65, to its current level of 14.45. High oil prices and strong growth are likely to sustain demand for the NOK moving forward. The Norges Bank’s discomfort with the krone’s appreciation will slow the pace of this pair’s climb (and regardless, it is highly unlikely that the yen can also maintain its current pace of depreciation). Nonetheless, NOK/JPY should see gains past 16.00 in the second half of this year.
Richard Driver
Currency Analyst
Caxton FX
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There are two pieces of bad news from the UK economy, after what has been a pretty good run of positive headlines. Ratings agency Fitch has warned that it may downgrade the UK’s AAA credit rating in the next two years, revising down its outlook to negative. UK unemployment figures were also poor yesterday but sterling is standing up reasonably well for now.
After what could be a quiet morning, this afternoon brings some important manufacturing figures from the US.
There are two pieces of bad news from the UK economy, after what has been a pretty good run of positive headlines. Ratings agency Fitch has warned that it may downgrade the UK’s AAA credit rating in the next two years, revising down its outlook to negative. UK unemployment figures were also poor yesterday but sterling is standing up reasonably well for now.
After what could be a quiet morning, this afternoon brings some important manufacturing figures from the US.
STERLING/EURO: Weak UK claimant count data has stalled this pair’s climb past €1.20.
STERLING/US DOLLAR: Sterling remains under pressure against the USD, which is very well bid amid impressive data.
EURO/US DOLLAR: This pair continued to creep down lower and today’s US manufacturing data may add further weight.
EURO/US DOLLAR: This pair continued to creep down lower and today’s US manufacturing data may add further weight.
STERLING/AUSTRALIAN DOLLAR: This pair continues to climb as sentiment remains weak towards the aussie dollar.
STERLING/NEW ZEALAND DOLLAR: Sterling found some easy gains against the kiwi dollar yesterday, despite some excellent NZ manufacturing data.
STERLING/CANADIAN DOLLAR: The 1.55 level is providing some support at these low levels against the Canadian dollar.
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