UK Retail Sales Sinks the Pound

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Market Drivers for Feb. 15, 2013
Euro back to lows on ECB comments on exchange rates
UK Retail Sales miss badly
Nikkei -1.18% Europe -0.27%
Oil $96.89/bbl
Gold $1630/oz.

Europe and Asia:
EUR Trade Balance 12.00B vs. 10.7 B
GBP Retail Sales -0.6% vs. 0.5%

North America:
USD TIC Long-Term Purchases 9:00
USD Industrial Production 9:15
USD Prelim U. of Mich. Consumer Sentiment 9:55
USD Prelim U. of Mich. Inflation Expectations 9:55
CAD Manufacturing Sales 8:30

UK Retail Sales shocked to the downside taking cable back below the key 1.5500 level in morning London trade once again. UK retail sales printed at -0.6% versus an increase of -0.5% eyed as sharp drop in food sales affected the numbers.

Food sales dropped by a whopping -1.6% in January driving UK Retail Sales to their biggest contraction since April of 2012. The data was in sharp contrast to the latest British Retail Consortium survey which showed a pick up in demand. Part of the reason for the decline was the very adverse weather in January as heavy snows kept many consumers away from the stores.

Still despite the seasonal factors UK retail sales data clearly shows that the consumer is struggling which will likely result in very weak growth in Q1 of this year and perhaps even push the GDP into negative territory once again. The news had an immediate impact on the pound which tumbled to 1.5470 in the aftermath of the release before stabilizing slightly.

The pair has strong support near the 1.5450 level, but for the longs who had hoped that cable may rebound after several days of heavy selling today’s very weak Retail Sales report was a clear disappointment. The message from today’s report is that UK economy remains mired in a recession and further weakness in the currency is likely. If selling resumes in North American trade the pair is likely to test the 1.5450 level as the day proceeds.

Meanwhile a slew of comments out of G-20 sent EURUSD tumbling in early European trade when ECB officials suggested that euro was fairly valued hinting that any appreciation in the unit would be viewed unfavorably. Bundesbank President Weidmann stated that he cannot that euro is seriously overvalued and noted that he feared politicization of FX rates. Meanwhile ECB President Mario Draghi said that exchange rate is not a policy target but is important to growth.

Both men have tried painfully to dance around the exchange rate issue while at the same time acknowledging that the rise in the EUR/USD could have a negative impact on growth in 2013. The issue of higher EUR/USD exchange rates came to the forefront yesterday after the release of very disappointing GDP numbers in the region that showed wider and steeper than expected contraction in the Eurozone. Most troubling was the decline in export growth that bodes poorly for the region as a whole.

With domestic demand sharply down in most of the EZ due to the lingering effects of the sovereign debt crisis, exports are seen as the path to growth and recovery in 2013. However, higher exchange rates make goal much harder to achieve. Complicating matters further is the fact that the ECB mandate is for monetary stability which by definition calls for stable and steady rates, therefore officials in the EZ are reduced to simply asking other G-7 members to refrain from any exchange manipulation since their own rules prevent them from taking any action on that front.

Therefore today’s carefully worded rhetoric was seen as an attempt to curb any further appreciation in the EUR/USD without actually threatening any policy actions. The EUR/USD slipped to a day’s low of 1.3310 in the wake of Mr. Draghi’s comments but has since rebounded as EZ Trade Balance data printed slighted better than forecast at 12B for December. Still the gains were driven by a sharper curb in imports as exports fell by -3% providing little fundamental solace for the long. The EUR/USD has very strong support at the 1.3300 level but if the pair breaks that level later today it could tumble to 1.3250 as the “EZ recovery” euphoria rally of the first few weeks of this year is clearly starting to unwind.

Boris Schlossberg
Managing Director

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