NEWS / Foreign Exchange

UK Retail Sales Mixed in March

- The European indices are currently trading higher on renewed merger and acquisition speculation, led by increased bids for Alliance Boots in the UK.

- European government bonds are currently trading lower in the session extending losses seen in the later part of yesterday's session as US investors. Selling in the fixed income sector has also been attributed to a rebound in equity markets following jitters surrounding Chinese GDP data yesterday. Gilts are currently trading slightly higher following mixed retail sales data in the UK, which fell below expectations m/m, and exceeded expectations y/y.

- French consumer spending rose more than expected m/m to 0.7% in the month of March from -0.5% in February; consumer spending rose to 6.3% y/y from 5.8% in February. French consumer spending rose as spending on household durables outweighed declines in spending on autos and clothing.

- UK retail sales fell more than expected to 0.3% m/m in March from 1.4% in February, while falling less than expected to 4.8% y/y from 4.9% for the same periods. There were upward revisions to February's reading, which were already at multi-month highs. Retail sales were considered by some to be a key data point, which could possibly sway some Bank of England members to vote for a 50 basis point interest rate hike at the May 10 meeting.

- Swiss producer and import prices were in line with expectations at 0.3% m/m, but slightly exceeded expectations y/y coming in at 2.4% led by an increase in energy prices as well as the costs for metal products.

- In an interview overnight the Bank of England's King said that he sees inflation moving closer to the 2.0% level once short-term factors fade. King said that the MPC is absolutely determined to bring inflation back down to its target level, noting that he has no idea on what the outcome of the next MPC meeting may be.

- The ECB's Weber said in a newspaper interview overnight that he cannot give the "all clear on rates" noting that the ECB must assess price risks and will act if necessary. Of the German economic upswing Weber said that it may last for years.

- The German Minister of Finance said overnight that first-quarter GDP should have barely weakened despite the implementation of the VAT. The MOF said that export growth is expected to continue within the coming months, and said that the higher Euro exchange rate, oil prices, and a stronger economic slowdown in the US pose risks.

FX Market Briefing

- EUR/USD EUR/JPY - There have been a lot of comments regarding the Euro from the Eco-Fin meeting which commenced today, and will end tomorrow. The general consensus amongst the participants thus far appears to be that the current Euro FX levels are not a major cause for concern, however some participants believe that current levels warrant close monitoring. While, thus far, the tone has not changed, and it doesn't seem likely that it will change if Euro levels remain near current levels in the near future, analysts are now looking for any indication on whether or not participants will express any concern over the possibility of a stronger Euro in the near future.

- Headline statements from participants thus far:

- Slovenian Finance Minister: No need to panic about Euro level

-EU's Juncker: Reiterates that there is no need to worry over the Euro's strength; Says that markets are ill-advised to bet one-way on FX.

I- rish Finance Minister: No reason to panic on Euro FX strength;Talk of an overly strong euro is not helpful.

- Spanish Finance Minister: Watching the Euro with interest; Doesn't see a cause for concern; Would be concerned by high forex volatility

- Dutch Finance Minister - Currently Euro levels are not a cause for concern.

- GBP/USD GBP/JPY - Fall from session highs following retail sales data. March retail sales were 0.3% m/m, below estimates of 0.5%, while retail sales were 4.8% y/y, above estimates of 4.7%. The prior m/m figure was revised up to 1.6% from 1.4%, while the prior y/y was revised up to 5.1% from 4.9%. There was a lot of speculation that the retail sales figures would come in much higher than expected considering the readings on key data earlier this week. Some investors speculated that, if much stronger than expected, the retail sales data could possibly sway some Bank of England members to call for a 50 basis point rate hike at the May 10 MPC meeting. Economists are currently forecasting a 25 basis point interest rate hike to 5.50%. Recall that earlier this week UK CPI was 3.1% y/y above estimates of 2.8, the highest level since August of 1992. This prompted the Bank of England's King to send the required explanatory letter to Chancellor of the Exchequer. Also recall that average earnings including bonus rose to 4.6% in February, above estimates of 4.2%, to its highest level since February of 2005. In an interview overnight the Bank of England's King said that he sees inflation moving closer to the 2.0% level once short-term factors fade. King said that the MPC is absolutely determined to bring inflation back down to its target level, noting that he has no idea on what the outcome of the next MPC meeting may be.

- Ahead of the May 10 MPC meeting come of the key data release in the UK are as follows:

- 4/23 - Mar Preliminary M4 Money Supply

- 4/25 - Q1 Preliminary GDP

- 4/26 - Apr Nationwide House Prices

- 5/2 - Mar Final M4 Money Supply