Forex Market Update: EUR/USD Stalls Ahead of 1.4000, British Pound Slumps Following t

U.K. retail sales showed a correction in May, with sales down 0.6% m/m, against a median forecast for a 0.4% m/m increase. Sales rose 0.9% m/m in April, underpinned by Easter sales but reversed part of that increase last month. On the year, sales fell 1.6% (median -0.1%) , versus a 2.6% increase in April. Retail sales have held up better than expected so far this recession, but we see the risk of subdued consumer spending going forward as unemployment continues to rise even as there are no signs of the economy starting to recover.

EUR/USD experienced a deep retracementafter it made a failed attempt to break 1.4000 in early trade. Early dollar selling by Asian sovereigns lifted EUR/USD to 1.3990, but gains were rebuffed by heavy option related offers, which were linked to a 1.3800-1.4000 ‘double-no-touch’ position that is reportedly rolling off at today’s N.Y. cut. The fall out in Cable was also a leading influence and encouraged interbank names to scale back recent long positions and forced a EUR/USD low of 1.3907. News out of the European press hasn’t been particularly encouraging, with more job losses cited and a lower GDP forecast for German GDP from the Hamburg World Economic Institute. EUR/USD will continue to take its influence from broader dollar movement and equity markets. This week has seen a more cautious tone, with some retrenchment in the global deflation trade as more realistic expectations set in, which hampered speculative demand for EUR-USD and the crosses.

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