Dollar struggles to sustain the gains by Richard Driver of Caxton FX on 21-Mar-2012

The US dollar has recently posted ten and eighteen-day lows against both the euro and the pound respectively. This belies the excellent growth data that has been surfacing from the US throughout March.

The highlights from last week included some strong US retail sales numbers, a positive US bank stress test result and some further impressive US manufacturing growth figures. The dollar sold-off on Friday however, largely a as a result of the softer-than-expected US inflation figure, which caused some players to revise their bets on the likelihood of 'QE3' from the US Federal Reserve.

Fed Chairman has indicated that QE3 is unlikely to be adopted and we maintain this view, which should aid the dollar this year. As the Fed’s Dudley reminded us yesterday, this is all contingent on the maintenance of the uptrend we are seeing in the US economy. Despite Friday’s poor US consumer confidence figure, there is little need to revise our bullish expectations for US GDP in 2012.

MPC minutes and UK annual budget comes into view

Bouncing back from last week’s poor UK unemployment figures and Fitch’s downgrade to the UK’s rating outlook, the pound has made an excellent start to the week. Taken against a basket of 13 major currencies, GBP is trading at its strongest level in over a year. However, this morning’s release of the minutes from the Monetary Policy Committee’s March meeting represents a risk event for the pound.

The impact of this morning’s minutes on the pound will be dictated by the tone struck with regard to the UK economy and the voting pattern with regard to increasing the Bank of England’s ongoing quantitative easing programme. Yesterday’s UK inflation data revealed a further decline in price pressures to 3.4% (y/y), which highlights the scope for further QE should the MPC feel it necessary. King has indicated that enough QE has been done but the uncertain outlook for the UK economy will certainly keep UK data (such as Thursday’s UK retail sales figure) in focus in the coming months. Nonetheless, the slight uptrend in UK growth should improve the chances of a less dovish, sterling-positive MPC minutes release.

The UK Annual Budget announcement from Chancellor George Osborne will also be eyed closely on today. In light of Fitch’s warning that the UK could lose its coveted AAA credit rating, Osborne is likely to 'stick to his guns' with regard to his austerity programme.

GBP may benefit from some support if Osborne can convince the markets that he can fuel UK growth amid ongoing belt-tightening. While significant domestically, there may well have to be some major headlines out of Osborne’s budget in order to cause much of a stir in the currency markets.

Sterling made another attempt at the $1.60 level on Monday but once again fell short, which could signal another move lower for GBP / USD, which currently trades just below $1.59. Against the euro, sterling is trading firmly around €1.20, though once again progress is stalling at these levels close to multi-month highs. With eurozone growth data likely to be weak on Thursday, we continue to look for stronger GBP / EUR levels and lower GBP / USD levels.

End of week forecast
GBP / EUR	1.2075
GBP / USD	1.5675
EUR / USD	1.31
GBP / AUD	1.5250

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

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