The British pound advanced against the U.S. dollar for the second day but, the overnight rally was tempered as U.K. retail sales unexpectedly held flat in August, and the slump in private-sector spending paired with the rise in unemployment may drag on the exchange rate going forward as investors weigh the prospects for a sustainable recovery.
[U][B]Talking Points[/B][/U]
[B]• Japanese Yen: Mixed Across the Board
• Pound: Retail Spending Holds Flat in August
• Euro: Trade Surplus Widens in July on Higher Exports
• US Dollar: Housing Starts, Building Permits on Tap[/B]
The British pound advanced against the U.S. dollar for the second day but, the overnight rally was tempered as U.K. retail sales unexpectedly held flat in August, and the slump in private-sector spending paired with the rise in unemployment may drag on the exchange rate going forward as investors weigh the prospects for a sustainable recovery. Nevertheless, as the GBP/USD continues to find near-term support at the 20-Day SMA (1.6415) this week, the rebound in risk appetite is likely to push the pair higher as investors move into higher yielding assets, and the pound-dollar may continue to retrace the sell-off from the previous week as market sentiment improves.
Consumer spending in the U.K. held flat amid expectations for a 0.1% rise after increasing 0.2% in July, while the annual rate of consumption jumped 2.1% from the previous year. The breakdown of the report showed demands for clothing and footwear slumped 1.3% in August, with non-food store sales falling 0.6% during the month, while discretionary spending on food increased 0.7% from July. The data foreshadows a weakening outlook for the region as private-sector consumption accounts for more than two-thirds of the economy, and households may continue to scale back on spending going into the following year as they face a weakening labor market paired with tightening credit conditions. At the same time, a survey by the Bank of England showed Britons anticipate inflation to grow 2.4% over the next 12 months, which remains unchanged from May, while 48% of the general public anticipates the central bank to increase the interest rate in 2010. As a result, the stickiness in the inflation outlook paired with expectations for higher borrowing costs may lead the BoE to hold a neutral policy stance going into the following year, and increased speculation for a rate hike in 2010 is likely to drive the exchange rate higher over the coming months as investors weigh the outlook for future policy.
The EUR/USD advanced for the fourth consecutive day and rose to a fresh yearly high of 1.4770 however, as the pair remains heavily overbought, the pair may retrace the overnight rally as the RSI holds above 73. Meanwhile, the economic docket showed the Euro-Zone trade surplus widened for the fourth consecutive month in July to EUR 12.6B in July from a revised reading of EUR 5.4B, following a 4.1% in exports, while the seasonally adjusted reading increased to EUR 6.8B from EUR 2.3B in the previous. At the same time, construction outputs slumped 2.0% in July to mark the third consecutive decline, with the annualized rate tumbling 10.8% from the previous year, and the outlook for future growth remains uncertain as businesses continue to scale back on production and employment to weather the downturn in global trade.
The U.S. dollar continued to lose ground against its currency counterparts as investors scaled back demands for safe-haven flows, and the greenback may face increased selling pressures over the next few hours of trading as equity futures foreshadow a higher open for the North American session. Nevertheless, housing starts are forecasted to increase to 598K in August from 581K, while building permits are projected to rise to 583K during the same period, and the data is likely to encourage an improved outlook for the world’s largest economy as the housing market begins to normalize. At the same time, initial jobless claims are projected to rise to 557K in the week ending September 12, while continuing claims for unemployment benefits are anticipated to hit 6100K during the first week of the month, and the data may weigh on the outlook for future growth as the Federal Reserve anticipates the annual rate of unemployment to hit 10% by the end of the year.
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[I]To discuss this report contact David Song, Currency Analyst: <[email protected]>[/I]