[B]Talking Points[/B]
• Japanese Yen: Tertiary slip -1.6% vs. -1.0% expected
• Pound: UK Retail Sales first negative since April
• Euro: CPI in line
• US Dollar: CPI on tap
UK retail sales registered their first negative reading since April of this year and sent cable crashing through the 2.0500 barrier as traders feared that the slowdown in consumer spending would accelerate BoE’s monetary easing plans. The news on the consumer front confirmed the rather dour outlook from BoE yesterday which suggested that the UK economic risks were skewed to the downside as the country continue to suffer the consequences of the credit crunch in the financial markets.
As the center of global capital markets the UK economy is the most vulnerable nation amongst the G-7 to a financial meltdown that could hurt the hedge fund industry. While the downturn in the UK Retail Sales data today was as much a result of warm weather as softer consumer demand, it does suggest that growth may have peaked and if the continued fallout in the financial sector results in significant lay offs in the next several months, BoE will almost certainly be forced to ease, reducing pound’s attractiveness to the currency markets.
Yesterdays, BoE report created a major shift in sentiment against cable in the FX market. If in the next several weeks traders begin to see softer data from the UK, cable could be very susceptible to a run towards the psychologically important 2.00 level and remain weak on the crosses, especially against the euro where market expectations for further rate hikes remain in place.
The euro meanwhile came under some pressure from risk aversion, as equity markets from Tokyo to Shanghai to London all printed red and the EURJPY cross declined more than 200 points in overnight trade. In economic news EZ CPI printed in line with expectations rising to 2.6% on a year over year basis. This was the fastest rise in 2 years confirming the hawk’s position that inflation pressures in the EZ remain elevated.
Today, the market will get a glance at US CPI data expected to print slightly higher at 2.2%. Yesterdays tame PPI readings allayed some of the inflationary concerns and indicated that the Fed may have more room to ease should it decide to do so. Today’s CPI numbers could serve as another supporting argument that US core inflation remains relatively controlled despite the volatile rise in the energy and food sector. Overall, however, it is doubtful that the CPI release will have much of an impact on currency trade. The EURUSD appears to be in consolidative mode, having run out of steam after scaling the 1.4700 level. The pair will need fresh evidence of further Fed easing before attempting a run at the 1.5000 figure.
