British Pound Finds Its Footing As Retail Sales Sparkle
EUR softer on m/m but ok on y/y basis
CAD Building Permits on tap
USD only Fedspeak on docket
British Retail Consortium survey reported the strongest January sales in three years boosting cable above the 1.9600 level in early London trade. Same store sales rose 3.1% while total sales increased 5.2% on year over year basis. Both numbers handily beat estimates demonstrating the strength of UK consumer demand. Traders focus will now turn to the BoE MPC meeting on Thursday, and although this time only 5 out 62 economists polled by Reuters expect a rate increase from the UK central bank, the possibility of another 25bp hike albeit slight, does exist, given the BoE penchant for surprise. At present it appears that the UK consumer sector has been able to absorb higher interest rates with relative ease, however the question remains as whether this will be the case going forward. For now the data clearly shows that UK is enjoying the strongest economy in G-7 universe and that fact should support BoEs hawkish posture providing a bid underneath sterling for the time being.
The retail news out of the Euro-zone, on the other hand, was not as buoyant. EZ retail sales did increase, but only by 0.3% versus 1.1% projected. However the year over year comparison was more positive with sales rising 2.1% versus 2.3% forecast. The jury is still out on the impact to the consumer of the increase of German VAT from 16% to 19%. In general the EZ consumer still remains quite hesitant, although the improved labor environment in the region is creating a positive trend in spending. EZ Retail sales for example have expanded for there consecutive months, laying down a solid foundation for EZ growth in Q1 of 2007.
Data aside, much like the pound traders will look to BoE rate announcement in Thursday, EURUSD market players will devote all their attention to parsing President Trichets words as the ECB post announcement press conference which takes place on Thursday as well. However, it is very unlikely that Mr. Trichet will provide unequivocal guidance. Nevertheless, the market continues to be concerned with the issue of the halt to rate hikes after a final bump to 3.75% in March. If Mr. Trichet hints that this would indeed be the case, the EURGBP cross could see further erosion as traders adjust their rate expectations for the two currencies.
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