British Pound Extends Rally as Retail Spending in U.K. Exceeds Forecast, Euro Halts Two-Day Decline

Talking Points
•    Japanese Yen: Mixed Price Action Across the Board
•    Pound: U.K. Retail Sales Jumps 1.6%
•    Euro: German Consumer Confidence Holds Steady
•    U.S. Dollar: Jobless Claims, Fed Chairman Bernanke on Tap

British Pound Extends Rally as Retail Spending in U.K. Exceeds Forecast, Euro Halts Two-Day Decline

The British Pound extended the overnight advance to reach a high of 1.5000 as the economic docket reinforced an improved outlook for the U.K., but the lack of momentum to cross back above the 20-Day SMA (1.5080) may keep the GBP/USD within the narrow range carried over from the previous month as investors weigh the prospects for future policy. U.K. Chancellor of the Exchequer Alistair Darling held an improved outlook for the economy and said that the extraordinary efforts taken on by the governing is certainly “bearing fruit” during an interview with BBC television, and argued that the 25bp drop in his 2011 GDP projection remains “in line with the Bank of England forecast” as he pledges to halve the deficit over the next four-years.

The economic docket for the U.K. showed retail sales excluding auto fuels surged 1.6% in February to top forecasts for a 0.6% rise, while sales including gas receipts jumped 2.1% amid expectations for a 0.8% rise. However, there was a drastic downward revision in the previous month’s reading as spending excluding gas tumbled 2.1% versus an initial forecast for a 1.2% decline, and the ongoing weakness in the labor market will continue to drag on the real economy as private sector consumption remains one of the leading drivers of growth. As a result, the Bank of England is widely expected to maintain a dovish policy stance throughout the first-half of the year, and the central bank may look to support growth going into the second-half of 2010 as the MPC projects price pressures to taper off over the coming months.

The Euro halted the two-day decline against the greenback and rose to a high of 1.3352, but the single-currency is likely to face increased selling pressures over the near-term as policy makers look to support the ailing economies operating under the fixed-exchange rate system. European Central Bank President Jean-Claude Trichet said that the Governing Council will “keep the minimum credit threshold in the collateral framework at investment grade level (BBB-) beyond the end of 2010” while speaking in front of the European Parliament, and went onto say that the board will introduce a “grade haircut schedule” in January, which would allow the ECB to charge a higher rate to banks who submit lower-rated collateral. Nevertheless, the GfK consumer confidence survey for Germany unexpectedly held steady for April, with the index remaining at 3.2% amid forecasts for a drop to 3.1, while the M3 money supply in the Euro-Zone contracted at an annualized pace of 0.4% in February, which well exceeded expectations for a 0.1% decline.

The U.S. dollar weakened across the board, with the USD/JPY falling back to a low of 91.75 during the European trade, and the greenback is likely to face increased volatility during the North American session as Fed Chairman Bernanke is scheduled to testify on the central bank’s exit strategy at 14:400. The central bank held is likely to hold a dovish outlook for future policy as the FOMC maintains its pledge to hold borrowing costs at the record-low for an “extended period” of time, but comments highlighting a shift in the economic outlook could spark a rise in interest rate expectations as the board aims to normalize policy this year. Nevertheless, jobless claims for the week ending March 20 is anticipated to fall to 450K from 457K in the previous week, while continue claims for unemployment benefits are expected to contract 17K to 4562K for the week ending March 13, and the data is likely to encourage an improved outlook for future growth as the expansion in monetary and fiscal policy continues to feed through the real economy.


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