Sterling steady ahead of Q2 GDP revision - Q3 may be better by Richard Driver of Caxton FX on 21-Aug-2012

Sterling continues to trade comfortably above the €1.27 level, helped by last week’s news from the UK. First, UK inflation came in well above expectations at 2.6%, weakening the case for more QE. Meanwhile, the UK unemployment rate came in at an eleven-month low of 8.0% and almost six thousand less people claimed for unemployment benefits in July. This was largely thanks to the London Olympics, but it’s good news nonetheless.

Last week’s minutes from the MPC‘s August meeting were also positive for the pound. They confirmed that an interest rate cut is not on the Bank of England’s agenda. The option of further quantitative easing is certainly not off the agenda, though the vote this month was unanimously against the measure. However, the minutes revealed that several MPC policymakers viewed the decision to be finely balanced.

The final piece of news from the UK economy last week was the monthly retail sales figure from July. Retail sales surprisingly grew by 0.3% in July, which again raised hopes that UK growth is turning the corner and can pick up in the second half of the year.

The week ahead brings the revised UK GDP figure from Q2 and we are expecting the awful initial estimate of -0.7% to be revised up to an improved, though still worryingly poor, -0.5%. Nonetheless, the latest updates from the UK economy give some reason to believe that Q3 may return some positive growth.

No real signs of imminent ECB action, but market hopes remain high

There had been some early market positivity relating to weekend reports that the ECB is preparing a plan which includes buying Spanish and Italian bonds if yields breach pre-determined levels. The ECB is certainly planning something but the ECB has today denied the reports and to make matters worse for the single currency, the Bundesbank has reiterated its opposition to ECB bond-purchasing. The market is pretty much in the dark as to what the ECB is planning and this uncertainty has put the euro on the back foot today. However, the euro is finding plenty of support at $1.23 and could well maintain this as investors will not want to bet too aggressively against the euro in the build up to the ECB’s bond market intervention. What is highly likely to hurt the euro, though, is a lack of any detail at September’s ECB meeting. Market patience is by no means unlimited.

In the short-term the euro faces plenty of risks in the shape of Thursday’s growth figures. More of the same is expected, with the data likely to indicate further contraction. This week’s eurozone meetings will also be important, with Greece and Spain the main points of focus. Some concrete progress will be required if the euro is to advance beyond resistance levels up around $1.24.

End of week forecast
GBP / EUR	1.2775
GBP / USD	1.5650
EUR / USD	1.2275
GBP / AUD	1.5200

The dollar remains on the weaker side at present, despite some firmer US economic figures of late. This has helped sterling maintain levels close to or above $1.57 over the past week. With tough resistance having formed at these levels, we continue to anticipate a downside move for the GBP / USD rate. GBP / EUR is also performing a little better, having avoided a return down to €1.25. This pair is now trading at €1.2750, benefiting from plenty of demand at levels half a cent lower. We don’t envisage rapid upside progress for GBP / EUR, though a decent upward revision to the UK GDP figure on Friday could give the pound a nudge higher.

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

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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