Pound Weighed By Disappointing Retail Sales, As Dollar, Yen Gain on Risk Aversion

Talking Points
•    Japanese Yen: Continues to Find Support On Risk Aversion
•    Pound: U.K. Retail Sales Miss Expectations Adding To Bearish Sentiment
•    Euro: A Rise In Industrial New Orders Adds Support
•    US Dollar: An Empty Calendar Puts Focus On Equity Markets

Pound Weighed By Disappointing Retail Sales, As Dollar, Yen Gain On Risk Aversion

The pound traded lower during the European session after reaching as high as 1.6283 during Asian trading. Prevailing risk aversion and a less than spectacular U.K. retail sales report helped fuel bullish sentiment. Consumer demand rose 0.3% in December but missed forecasts for 1.1% as sales in non-specialized stores fell 1.0% offsetting a 0.5% gain in household goods.

Considering the improving labor market Britons were expected to open up their wallets more during the Holiday season. However, consumers facing a 2.9% rise in inflation may start to curb spending as they wait for their earnings to catch up. The BoE is expected to bring an end to their asset purchase program which could start to generate sterling support, if we see risk aversion fade. However, until then downside risk remain and will accelerate for the GBP/USD with a break below the 20-Day SMA at 1.6129. 

The Euro remains higher on the day against the dollar despite a sharp downturn during European trading, as positive fundamental data has helped generate support. Industrial new orders for the Euro-region grew by 1.6% in November led by a 1.8% gain in intermediate goods. However, a 1.2% decline in capital goods could be a sign that emerging concerns over the scope of the recovery has started to discourage mangers from making investments in the future, which could lead to stagnate job growth going forward. The EUR/USD has appreciated after finding support at 1.400 but a break below the psychological level would expose 1.3747-6/16 low.

The dollar has started to erase earlier losses as risk aversion flows continue to favor the greenback and yen. President Obama’s proposal to put new limits on the size and activities of the largest banks continues to drag on equity markets. The uncertainty of the future of the banking industry has made traders uneasy. Expectations have been that a correction was in order and the President’s proposal could be the catalyst that sinks stocks. Corporate earnings continue to cross the wires with Google’s results failing to impress last night after the bell. Analysts are holding companies to higher standards and profits generated on cost cutting may not be sufficient to inspire bullish sentiment. The absence of revenue growth will only perpetuate the prevailing concern that minus government stimulus the current global recovery will stall. An empty U.S. calendar should allow current pessimism to rein during the day supporting further dollar strength unless we see an anti greenback reaction to the proposed banking regulation.

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To discuss this report contact David Song, Currency Analyst: jrivera@fxcm.com