British Pound Maintains Broad Range, Euro Advances Despite Dismal Sales Report

Talking Points
•    Japanese Yen: Weakens Across the Board
•    Pound: Consumer Confidence Improves in January
•    Euro: Retail Spending Unexpectedly Holds Flat
•    US Dollar: ADP Employment Change, ISM Non-Manufacturing on Tap

British Pound Maintains Broad Range, Euro Advances Despite Dismal Sales Report

The British Pound tipped higher against the greenback for the second day to maintain the broad range carried over from the previous month, and we may see the currency continue to retrace the decline from earlier this week as market participants raise their appetite for risk. Meanwhile, consumer confidence in the U.K. improved in January, with the Nationwide index rising to 73 from a revised 70 in the previous month, and households may continue to raise their outlook for future growth as the economy emerges from the worst recession since the Great Depression.

At the same time, a report by the British Retail Consortium showed shop prices in the region increased at an annual pace of 2.3% in January after rising 2.2% in the previous month, while a statement from the HM Treasury said official reserves narrowed $250M during the same period after contracting $1603M in December. Moreover, service-based activity expanded at a slower pace in January, with the PMI reading slipping to 54.5 from 56.8 in the previous month, and the central bank is widely anticipated to hold the benchmark interest rate at the record-low of 0.50% at its policy meeting tomorrow schedule for 12:00 GMT as they aim to encourage a sustainable recovery. Nevertheless, market participants speculate the BoE to conclude its easing cycle and suspend its asset purchase program after meeting the GBP 200B target in January, and the MPC may continue to normalize policy throughout the year as price growth exceeds the 2% target for inflation.

The Euro extended the advance from earlier this week to reach a high of 1.4028, and the single-currency may continue to push higher over the remainder of the week as the economic docket reinforces an improved outlook for the region. Service-based activity in Germany grew at a faster pace in January, with the final PMI reading unexpectedly increasing to 52.2 from an initial forecast of 51.2, while the gauge for the Euro-Zone rose to 52.5 from an advanced reading of 52.3. However, retail spending in the euro-region unexpectedly held flat in January after contracting a revised 0.5% in the month prior, while the annualized rate slipped 1.6% from the previous year amid expectations for a 2.4% decline. As the European Central Bank continues to see a risk for a protracted recovery, the Governing Council is expected to hold its key rate at 1.00% this month, but the press conference with President Jean-Claude Trichet at 13:30 tomorrow is likely to move the market as investors weigh the outlook for future policy.

The greenback weakened against most of its major counterparts, while the USD/JPY pared the previous day’s decline to reach a high of 90.57, and the reserve-currency may face increased selling pressures going into the North American trade as equity futures foreshadow a higher open for the U.S. market. Nevertheless, the ADP employment report for January is expected to show a 30K drop in private payrolls, which will certainly not bode well for Friday’s non-farm payrolls release, while service-based activity is expected to expand at its fastest pace since May 2008 as market participants forecast the ISM non-manufacturing index to increase to 51.0 from 50.1 in December.

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