British Pound Jumps On Positive Retail Sales, Euro Finds Support Despite Weaker PMI

Talking Points
• Japanese Yen: BoJ leaves Rates Unchanged
• Pound: Retail Sales Unexpectedly Rises
• Euro: PMI Falls To record Low
• US Dollar: Consumer Prices On Tap

British Pound Jumps On Positive Retail Sales, Euro Finds Support Despite Weaker PMI
The British Pound jumped 80 bps to test 1.4300 on a better than expected retail sales print which saw consumption rise 0.7% in January. Consumer spending rose for a second month as Britons increased purchases of textiles as retailers continued to slash prices. Sterling would fall to an intraday low of 1.4150 on the back of continued weakness in equity markets and risk aversion flows. The GBP/USD had dropped nearly 300 pips from yesterdays high of 1.4440 as the global growth outlook continues to dim.

Mounting job losses may make it formidable for British consumers to maintain their current pace of spending. Although strong domestic consumption could help growth rebound, considering the depth of the current recession we should see Britons retrench going forward. The BoE is expected to lower its benchmark rate at its next policy meeting and embark on quantitative easing which could limit the pound’s upside potential. Yet the 1.4100 price level has provided staunch support and we may continue to see price action bounce from this level. However, if the price level fails then we could see the pair looks to test support at 1.3775.

The Euro found support after it fell to as low as 1.2563 despite a weaker than expected PMI reading. Indeed, the region saw continued weakness in manufacturing and services which were both forecasted to improve, sending the composite down to a record low of 36.2 from 38.3 in January. The indicator is a strong forecaster of future growth trends and its continued weakness puts in doubt a rebound in growth by the end of 2009. The weak data will also increase expectations that the ECB will cut rates at their March meeting. President Trichet in Paris today stated, "We have to construct, patiently and without a quick fix, a global market system". The central bank leader has maintained his call for patience which may signal that the central bank won’t cut rates by more than 50 bps, despite markets calling for more. He would also refute contentions that Ireland is a weak link in the economic union, which has been a growing concern. Indeed, many fear that the single currency could be in jeopardy as the weaker nations call for more aggressive actions while a stronger Germany and France prefer to take a measured approach and guard against future problems.

The U.S. government Inflation data is scheduled to cross the wires today and economists are forecasting that prices rose 0.3% in January, which would be the first increase since July. Despite the expected monthly increase the annualized reading is expected to fall to -0.1%, which would be the first year on year decline since 1955. The tick up in inflation in January could be a sign that prices are stabilizing, but the continued deterioration in the labor market and further contraction in the global economy should lead to prices falling further. Nevertheless, higher inflation could remind traders that interest rates near zero and the government pumping dollars into the system are a recipe for future inflation and may raise interest rate expectations, which would add to current bullish dollar sentiment. The greenback has benefited from risk aversion flows as equity markets continued their decline during Asia and European trading. The Dow has completely retraced all of its gains since the November lows and now that it has broken below the support level more losses may be ahead which could drive the dollar to surpass its highs.

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To discuss this report contact John Rivera Currency Analyst: jrivera@fxcm.com