Caxton FX Weekly Report: All eyes on the BoE

It’s time for the Inflation Report

After taking a slight hit last week, there may be more weakness to come for sterling as the BoE will release their inflation Report. After the unemployment rate unexpectedly dropped to 7.1%, the market has been speculating where forward guidance will go from here. Some analysts believe the central bank will lower the unemployment threshold further. In a speech a few weeks ago BoE Governor Carney said forward guidance will no longer focus solely in unemployment, but rather a broad range of factors. The central bank is also expected to raise its growth forecasts once again, and more importantly we expect Governor Carney to reiterate the fact that there is no need at present to raise interest rate anytime soon.

Any dovish language from the central bank will weigh heavily on the pound. Slack in the economy remains and we expect the Governor will draw some attention to this. With the lack of UK data and the BoE likely to dampen any rate hike expectations, it will be a difficult week ahead for the pound.

Eurozone GDP steps up

In the ECB press conference the central bank claimed they need more information in order to assess the likely path of inflation going forward. This week’s main release will be GDP figures which will provide the central bank with a better indication of where growth is for the Eurozone. The decision to hold off for a month allows the ECB to compile its latest macro-economic projections and for the first time, officials will be looking two years ahead, providing growth and inflation estimates for 2016. The ECB have been investigating a range of policy options, and these projections as well as GDP figures will be crucial when the central bank decide what policy tool is appropriate, as well as and whether or not to take any course of action.

President Draghi will speak on Wednesday ahead of the GDP release and the market will keep their ears peeled in case of any dovish talk. Strong GDP numbers will be key for the euro’s performance this week and could potentially push through support levels driving the GBP/EUR rate below 1.20.

A calmer week ahead for the US dollar

Last week was filled with volatility as investors tried to position on the back of the US non-farm payroll figure. Things are a little more settled for the dollar this week and the main release will be retail sales. The last employment report has displayed a confusing picture as non-farm payrolls were below estimates whilst
unemployment beat expectations. With the dollar in an uncomfortable position as investors struggle to make sense of the employment report, solid numbers should offer the greenback some support.

 The dollar may also benefit at the expense of sterling and the euro. Dovish rhetoric from the BoE could weaken the pound and with dollar buyers waiting in the wings, we expect the greenback to capitalise. Similarly, following the ECB press conference last week, attention is now on Eurozone GDP data. If these numbers disappoint, it would be an excuse for the dollar to drive EURUSD downwards. Fed Chair Janet
Yellen will testify on the Semi-annual Monetary Policy Report before the House Financial Services Committee and the Senate Banking Committee and this could also cause some volatility.

End of week forecast

GBP / EUR	1.1970
GBP / USD	1.6340
EUR / USD	1.3600
GBP / AUD	1.8200

Sasha Nugent

Currency Analyst

Caxton FX

No action from the ECB for now

The euro has been given a boost from less dovish remarks by ECB President Draghi, following the rate announcement which saw the central bank keep interest rates unchanged at 0.25%. The language was fairly unchanged considering what we have heard from the ECB in the last few months, however the unexpected dip in inflation had the market anticipating a more negative statement.

Draghi continued to emphasize the central banks focus on its medium to long term inflation expectations, claiming that more information is needed for the ECB to take action. The slip in inflation back to 0.7% y/y hardly affected the central bank’s stance and despite prolonged low inflation being a risk within itself, Mr Draghi said “We are alert to these risks and we stand ready and willing to act”.

There has been a grey area over what tools in particular the central bank stand ready to deploy. Some analysts thought the ECB could stop absorbing the euros created from its Securities Markets Programme. Although Mr Draghi claimed that this was one of the options being investigated, he also highlighted that there are other instruments being considered.

So where does the ECB stand now? In the same position it did before. The governing council require more information before deciding on whether to act, and “expect key interest rates to remain at present or lower levels for an extended period of time”. With Mr Draghi insisting the ECB does not see deflation in the eurozone, it is no surprise that the market took this as an opportunity to buy some more euros.

Sasha Nugent

Currency Analyst

Caxton FX

February 2014 Currency Report: Where will the BoE’s forward guidance lead us?

The pound dominated trading last month and economic figures continued to support the brighter outlook for the UK economy. This may all change this month as the BoE release their Inflation Report and express worries about sterling’s recent strength. We may also see investors begin to profit take as the market questions the pound’s recent performance.

We have got a little closer to identifying what may be in store from the ECB. At the WEF in Davos, ECB President Draghi reinforced his view that deflation is not on the horizon for the euro area, and also claimed the central bank stand ready to fight against such pressures. This should keep the euro fairly supported although tighter conditions in the money markets will keep the pressure on.

After beginning their tapering programme in December, the Fed decided to reduce asset purchases further by another $10bn. Ben Bernanke definitely seems to have gotten the ball rolling with regards to withdrawing stimulus, but whether his successor Janet Yellen will keep this up is the question. Janet Yellen is regarded as a dove, and this may be reflected in her views of the economy going forward.


The BoE lines up more talk to weaken the pound

In recent weeks, BoE Governor Carney has displayed some concern about the strength of the pound. Most of sterling’s momentum is due to economic figures which have displayed a much healthier economy. The latest unemployment figure showed the jobless rate fell to 7.1% (the lowest level since the first quarter of 2009) and this has brought in to question where forward guidance will head now. In their last monetary policy meeting minutes the central bank saw no need to raise interest rates just yet, and this suggests that the bank are in no rush to tighten monetary policy even after the 7% threshold has been breached. At the WEF in Davos the Governor said that forward guidance will no longer be linked to just the unemployment rate, but rather a range of factors that reflect the overall state of the economy.

The latest GDP reading showed that the economy grew by 1.9% in 2013, the strongest level since 2007. Although this is an encouraging number, the latest labour market figures revealed that total hours worked grew by 1.1% meaning that output per working has fallen. These numbers highlight the issue with slack and productivity and it is likely we will see more focus on this in the weeks ahead.

GBP/EUR

A little insight into what may be in store from President Draghi.

Eurozone figures have shown some improvement over the last few weeks, especially PMI data which the market responded to well. Ireland has made a smooth exit from its bailout plan whilst Portugal looks on track to do the same. Despite some optimism brewing in the Eurozone, sterling still remains firmly in
control of the GBP/EUR as global deflation is a main concern especially in the Eurozone. At the WEF, ECB President Draghi explained that he does not see deflation in the Eurozone but rather a prolonged period
of low inflation. This language is similar to what we have heard from the central bank in the past few months but the surprise drop in inflation back to 0.7% y/y has kept the pressure on the ECB. More importantly,
Draghi explained that quantitative easing – an option adopted by both the Fed and BoE- was not on the table as the European Union treaty “prohibits monetary financing”. In order to combat the lack of lending in the euro area, Draghi said he favoured another approach which involved the ECB buying packaged loans.

The ECB will meet this week and announce their interest rates decision. Considering the bank’s views regarding inflation expectations and price stability, it is unlikely that we will see any change in policy. With regards to inflation, focus remains firmly on price stability and it is clear that downside risks need to materialise in order to see further easing from the ECB. Nevertheless, the market will be watching closely for any change in rhetoric from the central bank.

GBPUSD

Another taper from the Fed, and dollar momentum gets underway

In Ben Bernanke’s last FOMC meeting another $10bn of stimulus was removed from the asset purchase program thanks to a unanimous vote. A further reduction in stimulus has negative effects for emerging markets, yet no attention was drawn to the recent chaos which resulted in a number of central banks having to raise interest rates. The decision also suggests that the central bank is optimistic about growth and is not fazed by the last employment report. This result was widely expected and after months
of sterling directing the rate higher, we may be seeing the beginning of a downward trend in this pairing.

The last nonfarm payroll figure came in well below estimates, whilst the unemployment rate dropped from 7.0% to 6.7%. On the surface, the jobless rate may seem encouraging, but the fall was due to a reduction in the labour participation rate which declined to 62.8%, the lowest level since 1978. This is a medium-to-long term concern which could dampen the view of the labour market. Friday’s release will be just as important as the last, and two consecutive poor readings will bring the Fed’s decision to taper into question.

We expect the pound will weaken in the course of this month as remarks from the BoE weigh on the currency. This leaves the ball in the dollar’s court, and as long as the economic data supports an improving
economy, the downward trend in GBP/USD should continue.

GBP/EUR- 1.2150
GBP/USD- 1.62
EUR/USD- 1.3380

Sasha Nugent
Currency Analyst
Caxton FX

Caxton FX Weekly Report: The market focuses on the ECB

PMI data encourages more sterling buying

Sterling strength has held on, and a light calendar hasn’t stopped investors favouring the pound. Despite manufacturing PMI reading coming in below estimates, PMI data released in the coming days should provide the pound with support, especially if figures surprise on the upside. The BoE will announce their interest rate decision this week and considering recent comments from MPC members, we doubt there will be any change to policy. The market’s focus is now on the Inflation Report which will most likely see MPC members adjust forward guidance to focus on broader measures. As long as economic figures support a brighter outlook, demand for sterling will remain. The market is not yet convinced the central bank will maintain low interest rates and as long as there is a sense of optimism, speculation regarding the likely timing of tightening will continue to keep sterling on the front foot.

Inflation falls back to 0.7%, what will the ECB do?

In a number of speeches, ECB members have said they do not see the Eurozone entering deflationary territory. The markets however disagree, and some investors feel the ECB will need to act soon in order to prevent deflation. The last Eurozone inflation figure showed inflation eased back to 0.7% y/y and this has kept the pressure on the ECB. Some investors are speculating that the central bank will take action as soon as this week when the committee meet to discuss monetary policy. President Draghi has repeatedly said the ECB will be prepared to fight deflation and in the press conference this week we could hear more about the tools the bank favours, if and when they choose to deploy them. At the WEF in Davos, Draghi hinted the bank could buy packages of bank loans to households and companies.
This week Eurozone PMI data will be released but it is unlikely these figures will do much to bolster the single currency. The market is still willing to buy pounds and the dollar is also favoured over the euro leaving more room on the upside for GBP/EUR and downside for EUR/USD.

It is the non-farm payrolls time again

The Fed’s decision to taper assets purchases has brought the dollar back in control against many of its counterparts. However, the outcome of Friday’s employment report may bring the greenback’s recent strength to a halt. The last employment report disappointed, but the Fed shrugged this figure off when deciding to reduce QE further by another $10bn. Friday’s reading will need to come in line with estimates if demand for the dollar is to continue. The participation rate will also be important considering its recent decline.
There are a number of economic figures that will be released in the run up to the announcement and provided the readings are solid we could see demand for the dollar build ahead of the employment report. ISM Manufacturing PMI, factory orders, ADP Non-Farm Employment Change will all be published and this should offer the dollar some support in the days ahead. We expect the dollar to extend gains this week against both the euro and sterling.

End of week forecast

GBP / EUR	1.2175
GBP / USD	1.6300
EUR / USD	1.3420
GBP / AUD	1.8600

Sasha Nugent

Currency Analyst

Caxton FX

You can’t keep the pound that easily

In his first speech regarding Scottish independence, BoE Governor Carney outlined the potential issues that could arise if the Scottish kept the pound as part of a currency union. The Governor referred to the eurozone as an example of the significant steps that would need to be taken to support a monetary union. Carney said the Scottish government would have to give up some of its sovereignty over fiscal policy, and there would also need to be fiscal risk-sharing and solid banking arrangements.

The UK treasury has said it is highly unlikely that a currency union will be agreed and the Scottish government needs a plan B. The SNP have so far failed to come up with a “plan B” and despite this being a point of weakness, it is unlikely to hinder the campaign.

Sasha Nugent

Currency Analsyt

Caxton FX

Emerging market central banks rush to curb rapid currency depreciation

In the last 48 hours we have seen emerging market central banks take bold decisions in order to curb severe currency weakening as turmoil in emerging markets strengthened, and investors rush towards safe haven currencies. The Reserve Bank of India was the first to get the ball rolling in a surprise move raising interest rates by 25 basis points to 8%, in a bid to fight back against inflationary pressures.

The Turkish Lira was one of the worst affected currencies as political concerns also weighed on the currency. In an emergency meeting the Turkish central bank raised all the main interest rates, in an attempt to stabilise the currency. The overnight lending rate rose to 12% from 7.75%, the overnight borrowing rate rose to 8% from 3.5% and the one week repo rate increased to 10% from 4.5%.

The South African Reserve Bank also followed suit as the nation battles with labour disputes. The bank raised its borrowing rates by 50 basis points to 5.5% in spite of the fact that inflation remains with the central bank’s target range of 3%-6%.

Despite all these efforts to prevent further currency weakness, any gains after each announcement were soon erased. The market seems to be unimpressed by central bank’s attempts to convince the markets they are ready and willing to take action. Turkey’s central bank’s move could be described as delayed, and although the SARB rate increase was unexpected, it failed to grab investors’ attention. What the market needs is to be convinced that these central banks are completely committed and engaged in consistent aggressive policy in order to ensure not just a stable currency, but also price stability.

Sasha Nugent

Currency Analyst 

Caxton FX

Caxton FX Weekly Report: Sterling strength eases

Sterling takes a breather after an eventful week

After what has been a volatile week for sterling, the days ahead look a little calmer for the currency. UK unemployment data has given the pound a lot of support, despite the fact that the BoE are still a way of from raising interest rates. BoE Governor Carney claimed that the recovery is still not strong enough to warrant a
tightening of policy, and also expressed some concern regarding a stronger pound. These dovish statements will continue to weigh on the pound, at least until the next Inflation Report sheds light on where monetary policy is heading. The Governor is due to speak on Wednesday afternoon and if the language is similar to what we heard last week, sterling will be on the back foot against both the euro and the dollar. The UK preliminary GDP reading will be published on Tuesday and any upside surprise here should limit potential losses for the pound.

The ECB are prepared to fight deflation

Concern about global deflation is building, and after the ECB cut interest rates to combat deflationary pressures, the market has been worried about whether the deflation is on the horizon for the euro area. On the panel at the WEF in Davos last week, ECB President Draghi explained that he doesn’t see deflation in the eurozone. Draghi also signalled that the central bank is prepared to fight deflation by using means other than quantitative easing- an option both the Fed and BoE have adopted. The Governor suggested the bank may opt to buy packages of bank loans to houses and companies if economic conditions worsen.

With inflation at the forefront of the regions problems, CPI figures released on Friday will be a focal point. Another decent rise in price pressures will support Governor Draghi’s claim that the eurozone is not heading for deflation, but is rather experiencing a prolonged period of low inflation. Upside surprise here will be
welcomed and will most likely provided the euro with the boost needed to sustain levels beyond 1.37 in EUR/USD. Sterling will be on the back foot, and any upside surprise here could see levels below 1.20 return temporarily.

Will we see another reduction in stimulus from the Fed?

The Federal Open Market Committee will meet this week to decide whether to reduce stimulus further from the current $75bn per month. Despite the last payroll figure coming in short of estimates, the market hasn’t ruled out the prospect of another reduction from the Fed and this should bolster the dollar. Ben Bernanke 

comes to the end of his term as Fed chairman this week, leaving Janet Yellen to take up the post in February. 

A slew of economic figures will also be released, including CB consumer confidence, advance GDP, pending home sales and unemployment claims. Provided these figures produce some decent results we could see the dollar regain support and drive both the GBP/USD and EUR/USD rate lower. The greenback has managed to prevent the euro from maintaining levels above 1.37, but if the Fed maintain their current asset purchase program, and data disappoints, the euro could have the opportunity needed to sustain levels above 1.37.

End of week forecast

GBP / EUR	1.2010
GBP / USD	1.6480
EUR / USD	1.3600
GBP / AUD	1.9070

Sasha Nugent

Currency Analsyt

Caxton FX

Where is the Indian Rupee going from here?

The GBPINR rate has been trending upwards, and ever since the Federal Reserve Chairman Ben Bernanke announced the central bank’s intentions to reduce monetary stimulus, the Indian rupee has depreciated significantly.

In general there has been a great concern that many emerging market economies such as India will suffer from capital flight once the Fed decide to gradually return to more normal monetary policy. The decision to reduce asset purchases was considered the first step, and currencies such as the Indian rupee tumbled once the intention was announced last summer. More importantly, the rupee’s depreciation intensified due to its current account deficits and growth fears of the emerging markets as a whole.

India also suffers from very high inflation and this has also undermined the currency. The Reserve Bank of India (RBI) is now considering introducing an inflation target and this will allow the markets to clearly asses RBI’s performance as well as understand what their goals are.

On the UK side of things, the economic recovery has strengthened and economic fundamentals continue to paint a brighter picture for the UK. Inflation has slowed to the central bank’s 2% y/y target and unemployment has also plummeted to 7.1%. The rapid improvement in the outlook for the UK has strengthened the pound, and has also increased market speculation about when the BoE will be ready to raise interest rates. BoE Governor Carney has claimed that the central bank has no plans of raising interest rates any time soon, but as long as economic indicators continue to display and improving economic environment, expectations of a rate increase will remain.

Based on these factors we see expect the upward trend in GBPINR to continue. The rupee is stabilizing, but as the Fed continues to wind down purchases, and the economic situation in the UK improves the only way is up for GBPINR.

Sasha Nugent

Currency Analyst

Caxton FX 

What does the UK unemployment rate mean for monetary policy?

UK data delivered another surprise and according to the Office for National Statistics, the unemployment rate has dropped further to 7.1% from 7.4% bringing the 7% threshold given in forward guidance into question. With the unemployment rate now marginally above the benchmark, the need for the Bank of England to reassess the direction of interest rates is nearing.

Despite the labour market improving significantly faster than expected, the latest MPC meeting minutes suggest a rate increase is still unlikely to occur in the near future. The central bank sees no immediate need to raise interest rates, and with the inflation rate now on target there is even more room to maintain loose monetary policy. Of course the surprise drop in the unemployment will encourage the central bank to reconsider their view on the future for monetary policy, but the BoE will be cautious not raise rates prematurely.

This suggests that a re-evaluation of policy will rather result in an alteration in the central bank’s forward guidance, possibly a reduction in the unemployment benchmark to 6.5%, when the next quarterly Inflation Report is released on Feb 12. The market seems more excited about the fact that this unexpected result has brought the BoE closer to at least considering tightening policy, even if execution is not for a while yet. For now, this has been enough to keep demand for sterling rife.

Sasha Nugent

Currency Analyst

Caxton FX

Caxton FX Weekly Report: Sterling takes control of the GBP/EUR and GBP/USD rates

Unemployment data set to keep the pound in charge

Sterling begins the week in a good position after UK retail sales allowed the pound to recover some losses incurred earlier on in the week. We may see the strength continue as spotlight hits unemployment data due on Wednesday. The UK labour market has continued to show improvement, and a report confirming an increase in city hiring, further supports the brighter picture. The Bank of England have already acknowledged the progress made in the unemployment rate, and any upside surprise here will bring the 7% unemployment target closer. The potential implications this has on future monetary policy should encourage a firmer pound, despite weaker inflationary pressures. The BoE monetary policy minutes also due to be released this week, should shed light on the central bank’s current stance towards tighter monetary policy. Although the need for higher interest rates has faded, a stronger recovery should create an economic environment that can withstand tighter credit conditions. This should keep the possibility for a rate increase in early 2015 alive. We expect the pound will be able to remain on the front foot against both the euro and dollar this week.

More problems for the ECB

The liquidity situation in the Eurozone is becoming an even bigger issue for the ECB, which has resulted in higher money market interest rates. The ECB are now under even more pressure to act against tightening (short-term) credit conditions. ECB President Mario Draghi has expressed the central bank’s commitment to

act against “unwarranted tightening of the short-term money markets”, and this suggests we may see some more action from the ECB sooner rather than later.

A number of key figures will be released this week including German ZEW Economic Sentiment and PMI data. As usual, the manufacturing and services PMI releases will be a focal point and any indication of an improvement in these sectors will be welcomed. It is unlikely that this will take precedence over UK unemployment figures, however, some strong numbers here could limit the potential upside in the GBP/EUR rate. It is a similar picture against the greenback, and we doubt there is enough momentum behind the euro to encourage significantly higher levels in EUR/USD.

A lighter calendar leaves the greenback open for vulnerability

The dollar has strengthened in these last few sessions, especially against the euro. Upside surprise in US figures have encouraged speculation that further cut backs in asset purchases is on the horizon and this should keep the greenback fairly supported in the days ahead. Lack of economic releases from the US leave
the window open for some weakness, and the main releases this week will be unemployment claims, existing home sales, and flash manufacturing PMI. After the last unemployment claims figure came in unexpectedly strong, another solid figure should increase demand for the dollar. With eurozone PMI figures due to be published earlier that day, any disappointing numbers could get the ball rolling for lower levels in EUR/USD, and good US figures should support the move further.
It has been more difficult for the dollar to advance against sterling, and with expectations that the UK labour market has continued to improve, we doubt the dollar will be able to make any significant gains against sterling this week.

End of week forecast

GBP / EUR	1.2175
GBP / USD	1.6370
EUR / USD	1.3500
GBP / AUD	1.8770

Sasha Nugent

Currency Analyst

Caxton FX