[B]Talking Points
• Japanese Yen: Above 107.00 after Nikkei turns green
• Euro: Bit lower but consolidates around 1.4600
• British Pound: Dives as UK Retail Sales lowest in 11 months
• US Dollar: U of M on tap[/B]
The pound collapsed in early London trade today as UK Retail Sales turned negative registering its lowest reading in 11 months. The data printed at –0.4% versus 0.2% expected as slumping house values and record debt forced UK consumers to curb spending. The news re-ignited fears that BoE will have to cut rates at its next MPC meeting on February 7th prompting a 150 point sell off in the pound.
UK is now viewed as a miniature version of US, with its economy so heavily dependent on the finance sector and therefore highly vulnerable to further deterioration of both housing and capital markets. As we noted yesterday, “the true picture regarding UK monetary policy may emerge this Friday when the Retail Sales report is due. If the UK consumer spending misses to the downside, expect the slide in cable to resume.”
Today’s dour data is a big blow to sterling bulls who have been counting on a rebound in the pound. The pair remains highly oversold and may find support once again at the 1.9450 level, but any hopes for a possible run back to the 2.000 figure will now have to be put on hold. With key UK economic data behind us, the case for further BoE easing has become more compelling by the minute and that dynamic is likely to put further downside pressure on cable.
Meanwhile in the EZ the price action was relatively subdued with no material data on the calendar. Traders are still trying to come to grips with contradictory signals from ECB member Yves Mersch who appeared to be dovish one day and hawkish the next. Neutrality remains the most likely policy path for the ECB and that fact has taken quite a lot of momentum out of the euro rally. The pair has also suffered from fresh bouts of risk aversion as EURJPY rests well below the 160 level. Nevertheless, if US rates continue to decline euro’s long term trend remains to be up
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[B]To discuss this article please contact Boris Schlossberg, Senior Curency Strategist: [/B][email protected]