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SEPTEMBER MARKET SUMMARY 5 September 2013

From one of the darkest recessions of recent times we’re finally beginning to see emerging signs of a firmly-grounded recovery for the UK economy. Various institutions are revising up their projected growth forecasts for the UK and we have seen better than expected figures from services, manufacturing, factory orders, retail sales, house prices and mortgage approvals. Although this is quite a conclusive list of positive data for the UK, we are not out of the quagmire yet. After all, being complacent is partly what got us into that mess in the first place. There is some correlation between the pound and the UK’s performance as of late but perhaps not to the extent you may expect. Sterling has been performing well against its main trading partners but this could quickly reverse if we see the UK economy start to splutter. The green shoots of growth for the UK should be taken with a pinch of salt and the same can be said about the GBP’s current strength.

The picture for the eurozone is not quite as rosy as the UK at the moment. Elections in Germany and the very recent news that Greece will almost certainly need more aid at some point hang in the air. Although we saw the overall eurozone employment rate fall for the first time in two years last month, the peripheral countries are still seeing rising unemployment rates. Whilst on the surface the eurozone may appear stable, it is the fundamental data bubbling away beneath that is the worry.

In the US, focus has turned to whether tapering will happen in September or not, tapering being the scaling back on the amount of Quantitative Easing done each month ($85Bn) by the Federal Reserve. Some believe it will be on a large scale while others bel ieve it will be a slow process. One thing is for sure: it will have an impact on the strength of the USD.

GBP – More positive data for the UK

We’ve seen yet more positivity emanate from the UK since our last monthly update. Mark Carney, the new Bank of England (BoE) Governor, had his first public press conference and was less dovish than the markets expected, allowing the pound to rally. This, combined with a plethora of positive data from the UK, meant we saw Sterling gain over 3% versus the euro throughout the month of August. UK unemployment came out in line with expectations, UK retail sales improved, house prices showed an increase, UK growth data (GDP) also proved better than expected. In additiona, consumer confidence looked on the up, and mortgage lending increased month-on-month.

For the first time in a long time we are experiencing a good run of data, and things in the UK look pretty good. The markets seem to have taken well to the new BoE governor and his plans to focus on the unemployment rate for UK monetary policy and interest rate s etting.

Sterling has reversed its recent losses against a basket of currencies. Versus the euro we touched 1.18 (Interbank) again after hitting a four month low in July when we were trading in the 1.13’s (Interbank). The pound has climbed up from the low 1.48 (Interbank) versus the USD also seen in July to the current mid 1.5’s (Interbank). Throughout August, Sterling rallied over 4% against the AUD pushing the exchange rate up to the highest levels in three years, but even more impressive is the 10% gain the pound has made versus the South African rand over the last month, driving the rate to the highest levels since November 2008.

What lies ahead for GBP

With the BoE targeting 7% unemployment as a threshold for interest rate changes, it is understood that we will enjoy low interest rates (currently 0.5%) for the next 2-3 years. This is deemed good for the UK economy as it is seen as a method to stimulate growth through the means of borrowing, the housing market etc. If we continue to see better than expected economic data, then it’s difficult to see past the pound’s current upward trend. However, as the pound has rallied, we have reached some very significant technical resistance levels versus the euro and as quickly as the rate has risen, it could quite easily fall back again if it fails to push through this resistance. Versus the USD, it is not so clear cut and may be dependent upon the situation in Syria and the outcome of the US FED tapering.

EUR - On a slippery slope?

After a relatively positive start to last month, the euro seems to be on the wane and this being at a time when data suggests its performance should be to the contrary. Eurozone manufacturing has actively picked up across the region again. China, one of t he eurozone’s key trading partners, has lifted hopes that its economic slowdown is over and the US is still uncertain on when any “tapering” of its monetary policy will take place. This should all be playing into the euro's hands leading the currency to strengthen, but, in fact, the opposite has happened.

It is difficult to pinpoint exactly why the euro has lost ground against its major counter-parts. Some of it can be attributed to the fact that these countries have recently posted their own positive data, but perhaps more likely it can be attributed to the markets bel ief that the European Central Bank (ECB) will stick by its recent forward guidance and keep interest rates low for what President Mario Draghi called “an extended period of time.” This could mean that no matter how well the eurozone economic data proves to be in future, the ECB will stick to its guns resisting any temptation to alter policy.

FC Exchange is a trading name of Foreign Currency Exchange Limited. Registered office: Salisbury House, Finsbury Circus, London EC2M 5QQ. Registered No.05452483. Authorised by the Financial Services Authority (No.511266) under the Payment Service Regulations 2009 for the provision of payment services. HM Revenue & Customs MLR No.12215508.

FC Exchange Salisbury House, Finsbury Circus London EC2M 5QQ

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What lies ahead for EUR

Despite this period of improved economic data, the euro outlook remains extremely volatile. The ECB has recently reduced its overall growth forecasts for 2013, suggesting that the recent improvements are far from sustainable. It may also be the case that the ECB is erring on the side of caution as there is increased uncertainty surrounding the effect that the German elections, taking place later this month, will have on the market. As the political debates heat up, it looks ever clearer that providing further financial support to indebted European countries is seen as politically toxic, with the German public clearly shifting to a policy of protecting self-interests. German Chancellor, Angela Merkel, is currently experiencing growing opposition to a perceived weak-line approach with regards to the indebted European nations. As discussed in last month’s report, the euro’s decline may further be exacerbated by Germany challenging the legality of the ECB’s ‘Outright Monetary Transactions' programme through the German Supreme court later on this year.

German Minister, Wolfgang Schauble, also recently hinted that Greece will require a further bailout before the end of 2014, in addition to the two bailout packages totalling €240Bn already received. If accurate, such forecasts would have a further negative impact on the euro. If you add this to the fact that unemployment rates remain extremely high, pinning back any potential economic recovery, the picture at present is quite gloomy for the eurozone. We have been here before though; weak data resulting in the euro bizarrely strengthening and it is quite ironic that now we are starting to see the currency slide after finally providing some positive data. This shows just how fickle the markets are at present and makes it very difficult to predict which way rates will go in the short term.

USD – Cooling on monetary, heating on politics

In August, we saw the Greenback weaken further from its July losses and, in particular, versus the pound, falling by over 3%. The pundit tug-o-war continues with some still believing that the slowing of asset purchases (QE) by the Federal Reserve will begin this month after the Federal Open Market Committee’s (FOMC) two-day meeting on the 17-18th.

The mix of data out of the US has called to question whether a September taper is as likely as previously thought. Markets are anticipating further data releases at the beginning of this month to give a much clearer view as to a possible delay past September. Positively revised GDP data has given more impetus to those calling for action sooner rather than later whilst the cautious few would like to see further positive data and a retracement of bond yields on top of the looming debt ceiling in Mid-October before actionable words can be uttered by the Fed. On top of tapering, the US is working towards inserting itself more prominently into an escalating Syrian conflict which, were the situation to descend in the trouble country, would have dire consequences for markets.

What lies ahead for USD

Even with the current US dollar weakening in the past two months, projections are still relatively upbeat given that data is aligning more so with a healthier economy bringing the tapering game more into play. If positive data does unveil itself we could see GBP/USD head back down strengthening nearer to the 1.50 level over a trending two-week movement period. It is likely that although the data may come in positive, the FOMC will delay the September taper in favour of later date.

The current US unemployment rate at 7.4% is expected to remain unchanged for this month’s release, with jobless claims heading lower expectations are that non-farm payrolls will move up towards, and potentially past, 173K from the current 162K level seen in August.

If these employment predictions materialise, the Greenback may very well benefit across the board as its safe-haven appeal will be boosted, especially given the escalation of Syrian conflict and its impact on the international markets, i.e. risk off. Of course, though, any misses on the data side and, if congress does not find a solution for the upcoming debt ceiling, the dollar could be held at weaker levels going forward.