GBP/EUR 1.2111 (0.8254)
Markets continue to be mixed and there is a slight dislocation between US markets and the rest of the world. US equities sold off for the fourth day in five while European stocks were little changed following a two day advance, whilst Asian markets overnight rallied adding to the biggest weekly gain in over a year. UK retail sales were far better than expected helping to lift the pound and in the US strong jobless claims figures failed to support the USD as weak housing data offset the positivity.
The pound was a notable out performer yesterday as GBP rallied on surprisingly strong retail sales. Expectations for a decline in retail sales growth were well wide of the mark as Feb sales grew 1.8% vs .3% expected. This brought the year on year figure up to 4.2% and the initial reaction was worth almost 100 pips to GBPUSD while EURGBP broke down through key support. We have to question the aggression of the move as retail sales figures are unlikely to see the BOE adjust their rate outlook.
The final revision of Q4 GDP is on tap today from the UK and is expected to confirm the economy grew at .7%, this is a slowdown from the .8% growth seen in the three month period through September last year so there will be plenty of attention on April’s initial Q1 estimate to see if the pace of growth continues to slow. Unless we see a change to the GDP figure we would expect the response from GBP pairs to be relatively limited.
The Euro has been one of the weaker performers of the week and has dropped against most major counterparts, breaking back from highs against GBP just below .8400 to trade back to .8250, while EURUSD has fallen back below the key 1.3750 area indicating there may be further downside ahead for the pair. ECB rhetoric linking a strong EUR to deflation concerns has seen EUR selling in advance of next week’s ECB meeting, weak German import price index data and data released this morning showing Spain is back in a deflation environment has seen the single currency under further selling pressure.
European economic confidence data is due out at 10.00am however much of the focus for EUR traders will be on the German CPI reading due out at 1.00pm. The ECB tends to act when Germany is feeling the pinch and March inflation is expected to fall to .4% from .5%, bringing the year on year figure below the 1% level to .9%. Anything lower than this is likely to see EUR selling accelerate into the weekend.
The USD has struggled all week, while the trade weighted USD index is relatively flat on the week, an equally weighted index against a basket of majors has seen the USD facing declines. There has been a lack of major data from the US this week and as mentioned good data has tended to be offset by weaker prints. We saw this again yesterday as jobless claims were better than expected at 311k vs 323k, with consumption up 3.3% vs 2.7%, however this was offset by a 10.2% decline in pending home sales versus a year ago.
In the afternoon session attention will shift to US personal consumption and spending data, along with the final revision to March consumer confidence figures from the University of Michigan, with the latter release expected to be revised higher.