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British Pound Trades Heavy After Drop in Retail Sales, Dollar at the Mercy of Risk Appetite

Thursday, 23 October 2008 10:08:51 GMT  |  John Rivera, Currency Analyst

The Pound has traded heavy after it was reported that U.K. retails sales fell 0.4% in September. The Pound had reached as high as 1.6328 after it bounced from yesterday’s lows of 1.6138, but the fall in consumer spending has reignited concerns over the U.K.’s economy and reinforces the statements from BoE Governor King that the country is already in a recession.

Talking Points
• Japanese Yen: Trade Surplus Falls Sharply
• New Zealand Dollar: RBNZ Cuts Rates By 100 Bps
• Pound: Retail Sales Fall As Recession Fears Mount
• Euro: Finds Bid Tone Despite Drop in Industrial New Orders
• US Dollar: Jobless Claims On Tap

British Pound Trades Heavy After Drop in Retail Sales, Dollar at the Mercy of Risk Appetite

The Pound has traded heavy after it was reported that U.K. retails sales fell 0.4% in September. The Pound had reached as high as 1.6328 after it bounced from yesterday’s lows of 1.6138, but the fall in consumer spending has reignited concerns over the U.K.’s economy and reinforces the statements from BoE Governor King that the country is already in a recession. Britons have curbed their spending on clothing and household goods which fell 2.3% and 2.0% respectively, as a weakening labor market and the looming recession has sunk confidence. The Sterling may look to re-test yesterday’s lows as the interest rate outlook declines. Indeed, Credit Suisse overnight index swaps are now pricing in another 179 bps of rate cuts from the central bank in the next twelve months.

The Euro has started to trade higher after it rebounded from its lowest levels since 2006. After reaching a low of 1.2728 the single currency continues to trade higher despite mixed fundamental data, French consumer spending was at its highest in three months in September as it rose 0.6% from -0.2% the month prior. However, business confidence in the country fell to its lowest level in 15 years as the tight credit markets and declining global demand have dimmed the outlook. Meanwhile, Euro-Zone industrial new orders fell 1.2% in August and 6.6% year-over-year. Demand for transport equipment fell 10.6% followed by textiles falling 6.5%, the recent credit crunch should add to the weakness going forward. The story for the Euro-Zone economy is just starting to be spelled out and the fundamental data is expected to continue to deteriorate as the region contends with relatively high interest rates and declining global demand.

The USDJPY fell to its lowest levels since the March following the Bear Stearns bailout as it fell below 97.00. The pair has since seen choppy trading as the country’s trade report showed the surplus fell to 95.1 billion from 574.6 billion as exports declined greater than expected. Japanese fundamental data doesn’t typically hold mush sway over the currency, but with risk winds dying down it had a greater impact than normal. We could see the Yen strengthen today if we see more dour earnings reports from U.S. companies today as traders see very little reason to turn bullish.

The lack of fundamental data and major headlines hasn’t stopped the dollar’s rise as weak earnings and a declining outlook for the global economy has continued to fuel a flight to safety. Today’s initial jobless claims report could add to recession fears for the U.S. which could lead to some dollar weakness as it reminds traders that the U.S. fundamental picture remains in dire straits and the economy is most likely headed toward a prolonged downturn. Equity markets could find support as stocks trading at multi year lows are becoming attractive to bargain hunters which could lead to a increase in risk appetite and in turn a short term dollar reversal. Yet more dour fundamental data from Europe only perpetuates the sentiment that the U.S. is best positioned to emerge from the current crisis which will continue to remain a supportive factor for the dollar.

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