March UK growth gives room for optimism - Business Works
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March UK growth gives room for optimism

Richard Driver of Caxton FX Spanish PM Rajoy announced last week the most severe package of austerity cuts and tax rises in thirty years, in a bid to reduce Spains budget deficit from 8.5% to 5.3% of GDP. Rajoy has a pledged to the EU that Spain will achieve this. However, Spain is widely expected to miss its deficit-reduction targets and perhaps even more worryingly, the country is entering another painful recession.

Even if Spain does succeed in cutting spending as it promises (which is highly questionable), GDP will certainly be hurt. Considering that Spain contracted by 0.3% in the final quarter of last year, the prospects for 2012 look bleak indeed. Factor in the political risk that is surrounding Madrid and it is no surprise to see the market greet Rajoys cuts without any real enthusiasm.

Last Friday also saw the announcement of an increased eurozone bailout fund. The temporary bailout fund (the EFSF) will be allowed to run alongside the permanent fund (the ESM) for a year, taking the total lending capacity up to €800bn. This falls short of the bazooka measure that had been hoped for and market confidence remains very shaky. We must now wait to see if the IMF has seen enough commitment from EU politicians to justify a greater contribution to bailout resources from their side. At present, it is widely agreed that the firewall is insufficient in size, despite its recent boost. The available funds are well below the financing needs of Spain and Italy combined.

March UK growth figures provide some room for optimism

This week has seen considerable upside surprises from the monthly figures from the UKs manufacturing and construction sectors, with the latter showing an impressive 21-month high. With the OECD stating last week that it believed that the UK has entered a technical recession (predicting a 0.3% contraction in Q1), these latest growth figures suggest the UK has more momentum than has been recently assumed.

As ever, the UK services figure on Wednesday will be crucial, but we believe UK growth returned to positive territory in Q1. These latest UK figures are likely to be sufficient to stop further MPC members joining David Miles and Adam Posen in calling for further QE at the committees meeting on Thursday.

Elsewhere, US manufacturing data was impressive earlier this week and if this is matched by Wednesdays non-manufacturing and Fridays non-farm payroll figures, we may see the US dollar recover come of the losses it incurred in March.

End of week forecast
GBP / EUR 1.2075
GBP / USD 1.59
EUR / USD 1.3225
GBP / AUD 1.5550

Sterling breached the $1.60 mark in recent sessions but the air up here is still looking pretty thin and fairly stiff resistance is being met. Whether or not the dollar can bounce back in the short-term is dependent on Fridays US jobs figure. Against the euro, sterling is trading up at €1.20, having been rejected for the second time in a month at the €1.2050 level. A strong UK services figure on Wednesday will be required for another push higher. For the euros part, it is holding up remarkably well in the face of consistently poor eurozone growth figures, insufficient action from EU politicians and increased concerns over the growth and debt situation in Spain.

Richard Driver is a Currency Market Analyst with Caxton FX and can be contacted via:

This brief is prepared by Caxton FX Ltd for information purposes only and may contain personal views that are not the opinion of the company. This is not an offer to purchase or sell any security or an investment advertisement. Caxton FX Ltd is authorised and regulated by the Financial Services Authority, although foreign exchange transactions with Caxton FX are regulated by HM Revenue and Customs. This email does not constitute advice for any foreign exchange transaction, nor is it intended as a solicitation for funds or recommendation to trade.

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