NEWS / Foreign Exchange

Pound Rallies Further on Strong Retail Data, Euro Lower on Profit Taking

Talking Points

??? Japanese Yen: Better Trade Balance fails to help the yen
??? Euro: Trade Balance worse but demand for Industrial Orders firm
??? British Pound: UK Retail Sales Blow past expectations
??? US Dollar: LEI on tap

Pound Rallies Further on Strong Retail Data, Euro Lower on Profit Taking

Yen received no help from the better than expected Trade Balance data tonight as the rally in Asia Pacific stock markets fueled more carry trade flows and the unit lost ground against all the high yielders including the greenback. With BoJ essentially sidelined until after the summer election, trading in yen these days is driven strictly by the two opposing forces of demand for carry versus fear of financial risk. Thus, the yen is unlikely to rally significantly unless equity markets across the world begin to weaken.

Yesterday??™s Fed statement was interpreted as dovish by both the equity and the currency markets, but after further consideration the FX markets tempered their unadulterated dollar bearish view and the EURUSD declined on a round of profit taking after running stops at the 1.3400 level. In addition to expressing concern over the troubles in the housing market, the Fed also made a reference to rising inflationary pressures, noting specifically that ??? the Committee??™s predominant policy concern remains the risk that inflation will fail to moderate as expected.??? The key question, therefore facing the FX market at this time, is whether housing woes will outweigh the burbling price pressures evident in the US economy. To that end this Fridays US Existing Home sales report and next week??™s New Home Sales release will be critical to determining the near term direction of US monetary policy and the fate of the greenback. If the housing sector begins to crater, the markets will begin to believe that the Fed will have no choice but to ease rates regardless of the rise in inflation. If on the other hand housing stabilizes, the Fed is likely to keep rates steady for some time and the recent dollar shorts made on the assumption of a Fed rate cut may be forced to cover.

Meanwhile in UK today the economic news continued to be positive as UK Retail Sales blew past expectations rising 4.9% on a year over year basis. Given last months negative results, there was fear in the markets that the UK consumer may be reaching the point of exhaustion. However, today??™s report dismissed all those worries proving to be consistent with the recent evidence of a material pick in UK economic data. That data included, faster than expected house price gains, and hotter CPI numbers. In short, the UK Retail Sales report ratchets up the possibility of another rate hike by the BoE as early as its April 5th MPC meeting and cable responded in kind by rising above the 1.9700 figure in early London trade.