Market Drivers for March 27 2014

UK retail sales blow out estimates

Euro weakens as kiwi hits fresh highs

Nikkei 1.01% Europe .12%

Oil $100/bbl

Gold $1294/oz.

Europe and Asia:

NZD Trade Balance 818M vs. 595M

GBP UK Retails Sales 1.7% vs. 0.5%

North America:

USD Weekly Jobless 8:30 AM

UK Retail Sales blew past estimates rising more than three times more than forecasts lifting cable to fresh weekly highs today as the unit pierced the 1.6600 level. UK Retail Sales came in at 1.7% versus 0.5% eyed – a much stronger than expected reading that reversed most of the sharp decline the month prior.

Food sales were responsible for nearly half the rise in the headline number and fuel and auto related sales also rose by 0.9%. Spending on household goods actually dropped by 1.1%. The sharp rise in UK Retail Sales may have partly due to the rebound of better weather, but overall the number suggests that UK consumer spending remains robust and will likely keep pressure on the BOE to consider hiking rates this year.

The BoE Financial Policy Committee also released a statement noting that it will require banks to produce risk models for 2015 and will test them for housing market shock. One of the side effects of the prolonged low interest policy in UK has been the massive appreciation in the housing market and the BoE is clearly becoming concerned that this may lead to dangerous overvaluation conditions in the sector.

Yet the statement failed to suggest that the BoE will consider hiking rates anytime soon, indeed the FPC members noted that with tensions in Ukraine and China there is risk that markets are not prepared for normal rates. That last sentence took some of the enthusiasm out of the cable rally as traders pared their expectations and cable came off the session highs. Still the pair remains above the 1.6600 level and longs may try to make another run at 1.6650 barrier later in the day, as more and more economic signs point to a change of posture in UK monetary policy.

The euro on the other hand continued to drift lower, breaking below the 1.3750 level in mid morning European trade. There was no major economic news today, but the market is finally starting to realize the diverging policy agendas of the ECB versus the Fed, the BOE, the RBA and the RBNZ and the unit has weakened markedly against all those currencies.

In North American trade today the calendar remains generally light with only weekly jobless claims and the final GDP readings and the rest of the day may simply result in some consolidative trading. However, the weakness in the EUR/USD has now become evident and the shorts may try to press for a test of the 1.3700 support level as the day proceeds.

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