No need for further action from the ECB.... for now

The ECB have decided to keep interest rates on hold for yet another month despite concerns that the euro area may slip into deflation. The last inflation reading provided upside surprise and the central bank’s projections show they expect inflation to increase only slightly this year to 1%, to 1.3% in 2015 and 1.5% in 2016. Therefore, the ECB’s medium to long term projections of inflation still remain well anchored and predict inflation will be slightly below the 2% in the fourth quarter of 2016. The ECB remain ready to act however considering the governing council see their “baseline by and large confirmed”, the likelihood of further easing has been reduced.

Taking into account the euros strength over the past few months, it is worth noting that ECB President Draghi estimated that inflation had be reduced by roughly 0.4 or 0.5 percentage points due to the strength of the single currency. Nevertheless this has not discouraged the market from buying euros pulling the GBPEUR rate below 1.21, and EURUSD through 1.3830.

Sasha Nugent

Currency Analyst 

Caxton FX

March 2014 Currency Report: Eurozone inflation eases pressure on ECB

Sterling has remained in favour over the last month although it has lost a little ground. GBP/EUR is still trading above 1.21 whilst levels in cable remain elevated above the 1.67 mark. The BoE Inflation Report was released and the upward revisions in UK growth triggered aggressive sterling buying as optimism about the prospect of a rate hike increased. This month developments in the UK economic climate will be watched
closely especially considering recent concern that growth is slowing.

It is the same story again this month with focus primarily on eurozone inflation and the next move from the ECB. Data last month was not particularly impressive, but GDP figures at least pointed towards a slightly brighter outlook for the euro area. There is still talk circulating about the possibility of negative positive rates and this will be a key discussion ahead of the policy announcement.

The Fed tapering debate continues to be at the forefront of things and now the discussion is surrounding whether the Fed will continue to pull back purchases at the pace of $10bn a month or pick up speed. Economic figures from the US haven’t been particularly impressive over the last month especially the last two payroll readings; another disappointing number this Friday could result in some severe dollar selling.

Pound still in favour, but for how long

Demand for sterling hasn’t faded just yet and some of this is due to orders in relation to the Verizon and Vodafone merger. Other factors underpinning the pounds resilience is the on-going speculation regarding the path of UK interest rates. Although the central bank have consistently reinforced the fact that rates will remain low for a while yet, expectations that policy could tighten in the first half of 2015 have kept the currency competitive. Forward guidance is now based on broader measures with the focus of the MPC on reducing slack and increasing productivity. Comments from monetary policy committee members such as BoE member Weale have encouraged speculation by claiming the bank rate could rise even sooner if wage growth rises more quickly. The revised UK GDP figure confirmed the initial reading of 0.7% q/q growth but what was particularly encouraging was the contribution from business investment and exports. The BoE have highlighted the need for a pickup in business investment to help spur productivity growth, and this figure suggests that the recovery is broadening. As a result we expect sterling bulls will be comforted by this. The pounds performance this month will be partly dependent on whether data releases can keep the optimism brewing. Recently there has been some concern that growth in the UK is slowing and although the second GDP estimate was in line with expectations, PMI data this week will need to impress in order to keep demand for sterling strong. Wage growth in particular will be scrutinized considering the implications this has for monetary policy.

GBP/EUR

Will the ECB act?

Eurozone inflation data was released last week and this has resulted in some repositioning in both the GBPEUR and EUR/ USD rate. A lot of the reasoning behind the euro’s vulnerability has been the uncertainty behind what is to come next from the ECB. Recent data has not been disastrous as GDP data showed the French economy finally returned to growth in the fourth quarter. PMI figures on the other hand were not as positive but what cannot be denied is the progress being made by the euro area.

The reading of 0.8% y/y inflation can be considered a relief if we take into account the potential effect of a dip lower to 0.6%y/y. This would have definitely increased the pressure on the ECB to act. At least for now, the central bank has more room to assess the medium to long term outlook for inflation before deploying their monetary tools. There is still a lack of clarity about what tools in particular the ECB will choose when and if the time comes to act against deflation. Talks of negative deposit rates resurfaced last month and only temporarily weakened the euro. This highlights the uncertainty surrounding the issue and we expect the market to listen out for further clues as to what weapon is the central bank’s first choice.

GBP/USD

Third time lucky?
The past two US nonfarm payroll readings have been disappointing, and adverse weather has been blamed for the poor results. It was hard enough to get the market to swallow that reasoning after the last figure was released, but another weather excuse for this month’s reading won’t wash too well with investors. Other economic figures haven’t been particularly impressive either, as some were also affected by the climate. This month the market needs to see some solid numbers, especially if the Fed is to continue to withdraw their asset purchases.

Fed Chair Janet Yellen testified before the Senate Banking Committee last week and this gave the dollar some support. Taking into account Yellen is considered a dove, her remarks regarding the direction for monetary policy suggested that the recent developments will not result in a halt in the Fed’s tapering plan. The key focus for the market this month will be the decision by the FOMC when they meet mid month. The
statement will provide further clues about the committee’s current stance and attitude toward the pace of tapering. We expect the FOMC to continue reducing purchases by $10bn for now.

GBP/EUR- 1.2170

GBP/USD- 1.66

EUR/USD- 1.37

Sasha Nugent

Currency Analyst

Caxton FX

Caxton FX Weekly Report: Another poor employment report could hurt the US dollar

Can sterling remain in favour?

For yet another week sterling has remained fairly robust, although Eurozone inflation data encouraged some lower levels in GBP/EUR. In the days ahead, opportunity to pare back losses and we expect levels in cable remain elevated as the pound capitalises on weak US data. PMI data is back in focus and after the last round of slightly below expected figures, solid numbers here should keep the pound in demand. What will be key is to see growth in both the manufacturing and construction sectors continue to suggest the economy is gradually rebalancing. The BoE will meet again and announce their interest rate decision which we suspect will not result in much market movement. The outlook for the UK remains positive and as long as UK data continues to display this picture, it is more than likely that sterling buyers will continue to encourage a stronger pound.

ECB to remain on hold after eurozone data
The euro has started this week on a high, and it is unlikely that the ECB will pull the rug just yet. Eurozone inflation rose 0.8% y/y easing the pressure off the ECB and dampening expectations that the central bank will take action at their meeting later on this week. An above expected number hasn’t exactly removed the concern just yet. The reading was only a flash estimate which means there is always room for a downward revision. One thing that seems to be clear is there’s not sufficient evidence to warrant a change in policy from the ECB, and this should keep the euro well supported. Other figures such as retail sales, services PMI data and German factory orders could also support the single currency, although it will be difficult for the euro to advance further against sterling. With the dollar on the back foot and plenty of event risk ahead, disappointing US data could fuel a move further through 1.38 this week.

Third time lucky?
US non-farm payrolls is one of the most influential data releases and after two readings below estimates, this particular reading will be scrutinised. Although remarks from Janet Yellen last week suggest that softer data may not necessarily warrant a pause in tapering, a poor release on Friday may actually change the view of Chair Yellen. Ahead of the release a number of US figures will be watched carefully, as a number of data releases over the past month were affected by adverse weather conditions. Some more positive releases this week should see the greenback in better form, especially if payrolls provide some upside surprise.

The greenback may also receive a lift on the back of tensions in Ukraine. Russia has deployed military forces into Ukraine and they have now taken over army bases in Crimea. As the situation escalates and the West urge the Russian President Putin to withdraw troops, investors move towards safe havens currencies as the prospect of war increases. This should provide the greenback with a little more support, although the extra momentum will not limit the downside if the employment report disappoints.

End of week forecast

GBP / EUR	1.2170
GBP / USD	1.6650
EUR / USD	1.3740
GBP / AUD	1.87

Sasha Nugent

Currency Analyst
Caxton FX

Is the Chinese renminbi now a two way bet?

This week the fluctuation in the Chinese currency renminbi, had the markets worried as the appreciation that had been taking place over a number of years suddenly came to a halt. There were plenty of theories flooding the markets about why the currency and begun to weaken, even though the People’s Bank of China (PBOC) and Beijing had repeatedly made clear their intention to make the currency more volatile. As a result of the longer term trend, the gradual appreciation of the currency had encouraged investors to view the currency as a “one-way bet”, a trend that they were confident would continue.

It now seems that the PBOC have caught the market of guard in an attempt to fulfil their commitment to remove the renminbi's reputation as an effective one sided gamble. Traders now claim it is clear that the PBOC are intervening in order to guide the currency lower which in itself reminds us that the currency is quite a way off being freely floating. The central bank clearly still has the renminbi on a tight leash, adjusting its strength as it sees fit. However, at least this move achieved its goal of creating some volatility, and although we doubt the renminbi is a two way bet at the moment, creating a little uncertainty is certainly a step in the right direction.

Sasha Nugent

Currency Analyst

Caxton FX

Caxton FX Weekly Report: GDP data takes centre stage

Sterling stands firm

Although sterling strength has eased slightly in the past week, there is still plenty of demand for the currency. Even disappointing retail sales figures weren’t enough to really get the downward trend in GBP/USD and GBP/EUR going. In the days ahead there will be much less event risk, which leaves the window open for some lower levels in both these rates. The key release will be the second GDP estimate which is expected to be in line with the preliminary estimate at 0.7%q/q growth. Other economic figures such as CBI realised sales and BBA mortgage approvals should provide the pound with some support ahead of the GDP reading.

BoE Governor Carney will speak later on in the week and with the likelihood of interest rate increases underpinning the currency’s strength, sterling bulls will be watching carefully for any hawkish talk. Considering the momentum we’ve seen over the past couple of weeks we expect the pound will be fairly supported, but a light calendar leaves the currency subject to some weakness.

Time for eurozone inflation once again

Focus will shift towards the Eurozone this week as the flash CPI figure will be released, bringing the next move from the ECB into focus. Eurozone data hasn’t been too disappointing lately disregarding the not so impressive PMI figures. Nevertheless, there was nothing significant to suggest the ECB need to act at their next meeting, and we know from numerous speeches that downside risks need to materialise in order for the ECB to act. A lower than expected number will mostly likely cause some severe weakening in the single currency, especially against sterling.

Other Eurozone figures such as German unemployment change and German retail sales could also offer the currency some support. US data has been disappointing over the past week and some solid figures here could trigger some more euro buying ahead of the inflation release on Friday.

What does US GDP have in store?

In the past few weeks there have been some concerns about US growth, especially considering poor data, in particular the non-farm payroll release at the beginning of the month. Levels in cable remain elevated and US data due this week needs to impress in order to get the downward trend going. The key release will be the GDP reading and growth is expected to slow to 2.6% q/q from 3.2% previously. Adverse weather conditions have had an effect on data recently and we expect some of this will be reflected into the reading. The sharp drop in retail sales also support the likelihood that growth was much softer towards the end of last year and possibly the beginning of this year also.

Any upside surprise in this figure will most likely trigger some dollar buying. The Fed is yet to signal any move away from their current plan to continue tapering and for now this is keeping the dollar afloat. It will be a difficult week ahead for the currency and with the greenback on the back foot, we doubt investors will hesitate to weaken the dollar further on the back of some poor results.

End of week forecast

GBP / EUR	1.2060
GBP / USD	1.6620
EUR / USD	1.3770
GBP / AUD	1.8480

Sasha Nugent

Currency Analyst

Caxton FX

A confidence booster for the BoE

After the last flagship forward guidance from the BoE undermined the credibility of forecasts and expectations, things seem to be getting off to a better start for the central bank. For the first time since November 2009, inflation has dropped marginally below the inflation target to 1.9%, further justifying the need to keep interest rate at current levels.

In the quarterly Inflation Report released last week, the bank predicted inflation would fall below the 2% target and expect lower levels to remain for a while to come. A combination of lower inflation and a decent recovery creates an environment which will allow the BoE to continue to maintain their accommodative stance, and further support the recovery.

There is also a hope that as the recovery gathers momentum, lower price pressures will reflect into rising real wages as pay increases outpace inflation, therefore restoring purchasing power. The next key release will be tomorrow’s unemployment figures and although a drop in unemployment would be positive, the focus will be on wage growth.

For now BoE forward guidance remains credible, however with the market still set on a rate increase in 2015, investors may need a little more convincing that interest rates will remain low for a while yet.

Sasha Nugent

Currency Analyst

Caxton FX

Caxton FX Weekly Report: Sterling keeps the pressure on

Sterling soars
It seems that nothing can stop demand for sterling now. The BoE’s adjustment to forward guidance went down well with the market and fuelled significant strengthening of the pound. Although the central bank ruled out any immediate tightening, confidence about the UK outlook and the prospect for a policy tightening in the first half on 2015 is strong. This week there is an opportunity for the pound to advance further as unemployment data could help the pound rebound after inflation came in below estimates. Some more encouraging numbers here will most likely keep the dollar and the euro on the back foot for yet another week.

The latest MPC minutes will be published, and it is unlikely that this will encourage any significant sterling buying. In the last monetary policy meeting the committee opted to maintain the current level of asset purchases and hold the bank rate at 0.50%. Considering the Inflation Report was released just last week, we doubt rhetoric in the minutes will differ much and therefore expect minimal movement on the back of that release.

PMI attempts to rescue the euro 

Despite some solid GDP figures last week, the euro is still struggling against sterling, and has failed to really push the EUR/USD rate further through 1.37. Growth across the region has boosted hopes that the worst of the regions crisis is behind it and this has made the outlook for the eurozone a little brighter. This week Eurozone PMI data will be key and some impressive results should contribute to more a positive view, and therefore be reflected into euro strength.

Last week talks of negative deposit rates in the Eurozone resurfaced as ECB member Coeure implied the ECB had seriously been discussing this option. Although the effect on the euro was temporary the market is still unsure about what is to come from the ECB, which could keep the euro vulnerable.

An important week ahead for the dollar

The greenback has taken a huge hit, especially against the pound as US data continues to disappoint giving investors more excuses to favour sterling. Comments from Fed chair Yellen were regarded as dovish and this has also weighed on the dollar’s performance. A buoyant pound has pushed cable towards three year highs and with sterling buyers waiting in the wings, US figures this week will need to impress to ease pressure off the dollar.

The Federal Open Market Committee (FOMC) will release the minutes from their last monetary policy meeting. Considering remarks made by Fed Chair Yellen, the market will be looking closely for any sign of a dovish bias from the central bank. Since their last decision to reduce asset purchases further by $10bn, yet another disappointing employment report has been released. Although this is unlikely to have a significant impact on their stance, it has provoked some concern about the labour market and an upbeat tone is needed in order to provide the greenback with some support. Pressure on the dollar has eased slightly, however with plenty of event risk ahead, it may not be long before the dollar is penalised for more disappointing figures.

End of week forecast

GBP / EUR	1.2150
GBP / USD	1.6675
EUR / USD	1.3675
GBP / AUD	1.8550

Sasha Nugent

Currency Analyst

Caxton FX

Dollar performance may be limited if UK growth continues to surpass expectations

It wasn’t so long ago when the Fed signalled a wind down in asset purchases was on the horizon, and the BoE could only hope to shift towards more normal monetary policy. How times have changed, and although the Fed has managed to begin tapering, the delay and minimal monthly reduction has resulted in a reduced effect on the GBPUSD rate.

The UK made a surprisingly strong recovery in the second half of last year, and in particular the improvement in the labour market has spurred speculation about when the BoE will bite the gun and raise interest rates. Both economies are on the right track, however the last two non-farm payrolls figures have been disappointing and raised questions about whether the Fed could continue to cut back purchases by $10bn every month.

In her first testimony to the House Financial Services Committee, Fed Chair Janet Yellen acknowledged the development being made in the US economy, but also highlighted that there was still more work to be done and it is important to consider more than just the unemployment rate when “evaluating the condition of the US labour market". In the latest BoE Inflation Report, Governor Carney expressed a similar viewpoint, and despite raising growth forecasts, emphasized that the amount of slack in the economy is a big issue and other broader indicators will be needed to evaluate the economy’s progress. Forward guidance from both the Fed and BoE has indicated that rates will be held constant even after the unemployment thresholds have been breached.

The key difference in policy which may alter the performance of cable (GBPUSD) over the coming year will be the Fed’s decision to taper and hold rates vs the BoE’s decision to raise rates before cutting back on asset purchases. Initially, tapering was expected to have a larger effect on the strength of the dollar as the market viewed it as a tightening of policy. Ever since the UK economy picked up, and forward guidance created a benchmark to gauge the likelihood of rate hikes, the interest rate hawks have been fuelling a stronger pound. The prospect of a rate increase may be far more tempting than continued tapering, especially at a pace of $10bn per month. Although both central banks are trying to convince the markets that policy will remain accommodative, the Fed seems to have succeeded, whilst BoE has failed so far. The fact that the BoE’s initial projections for unemployment were badly timed has had a large effect on the credibility of its forecasts. This has allowed the market to go with its own estimates and continue to price in a rate increase in Q2 2015.

As long as UK growth continues to outperform, the possibility of a rate hike will increase limiting the dollar's potential. Disappointing US data will hurt the greenback, and with the market regarding Yellen as a dove, we doubt investors will hesitate to weaken the dollar further.

Sasha Nugent

Currency Analyst

Caxton FX

Governor Carney fails to convince the market

Today the Bank of England published its latest Inflation Report which was perceived to be broadly positive as the central bank raised its forecasts for UK growth. In his opening remarks, the Governor said the recovery is not yet sustainable and outlined in forward guidance that the central bank will not raise interest rates until more spare capacity has been absorbed. Other broader measures will also be looked at when considering whether to tighten policy, including the unemployment rate. There was also emphasis on the lack of business investment growth and even when the bank does raise interest rates, the process was described to be limited and gradual as the economy still faces a number of headwinds.

Although the Inflation Report does not lay out a timeline for when interest rates will rise, the market has taken the bullish growth projections as a signal that tightening in Q2 2015 is likely. Lack of productivity has been a key issue for the central bank and they have become even more pessimistic about the outlook. Taking this in account, it is surprising that this hasn’t pushed back market expectations of monetary policy tightening.

Considering the fact that the unemployment rate dropped significantly faster than the BoE predicted, it is no surprise that the market is drawing its own conclusions. Until the central bank is successful in reiterating their commitment to low interest rates, sterling bulls will keep demand for the pound strong.

Sasha Nugent

Currency Analyst

Caxton FX

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