The surprise 0.3% increase in U.S. January retail sales and core sales defies forecasts of a 0.3% and 0.4% respective decrease and is dragging the yen lower while leading to modest dollar gains versus other currencies. The clear winners from this report are USD/JPY, EUR/JPY and GBP/JPY , with the latter being particularly boosted by the Bank of England’s (BoE) hawkish inflation report showing price growth to further breach the mandated 2.0% target and possibly exceed 3% before year end. The report highlights the BoE’s inflation/recession dilemma after Governor King said two quarterly growth contraction were not to be ruled out. Yen weakens against most currencies but remains confined to preliminary support levels, while euro continues to steady following yesterday’s unexpected rebound in German ZEW confidence survey.
USD/JPY eyes 108.30
Today’s strong U.S. figures can potentially lift the pair past the 107.90s resistance to extend gains towards 108.30 largely on broad yen weakness rather than USD strength. The report should further boost U.S. equities, which is likely to prompt gains in the yen crosses. But the dollar rally is likely to run out of steam later in the session as traders scale down their positions ahead of Thursday’s testimony by Fed Chairman Ben Bernanke’s testimony, which is likely to prolong expectations of further rate cuts in the midst of rebounding credit spreads and rising market interest rates. Support crops up to 107.70, followed by 107.20.
Sterling lifted by inflation report
Sterling gains more than a full cent after the Bank of England inflation report shows inflation will further breach the mandated 2.0% target, exceeding 3%. The report highlights the BoE’s inflation-recession dilemma after Governor King said two quarterly growth contraction were not to be ruled out this year. King also added the Bank’s projections were based on the market’s implied forecast for two more rate cuts of 25-bps each in Q2 and another quarter of a point cut in the second half of the year.
Separately, the Royal Institute of Chartered Surveyors’ House Price index neared a 16-year low as surveyors expect further price declines in the three months to January.
Gains are seen limited at 1.9660, but weaker than expected U.S. retail sales (greater decline than 0.7%) may extend gains towards the 1.9690s. Yet we continue to deem the BoE’s need to cut as the dominant factor on sterling’s long term negative outlook. Offers seen intensifying at 1.9720, with preliminary support standing at 1.9520 and 1.9480.
GBP/JPY is seen the big winner of the day due to the BoE inflation report and stronger than expected U.S. data, which could build further gains towards 212.50 and 212.80. Resistance seen emerging at 213.00.
Euro not out of woods
Euro remains capped at the 1.4620 resistance ahead of key U.S. retail sales. The currency recovered despite an unexpected 0.2% decline in Euro zone industrial production in December. Euro has been boosted by an unexpected improvement in Germany’s ZEW confidence survey, but markets remain apprehensive of the intensifying downside risks to growth. Strong U.S. retail sales to confirm resistance at 1.4620, shifting bias towards prolonged losses near 1.4520. We maintain our month end forecast of $1.45 with the possibility of seeing 1.44 handle at the interim.
EUR/JPY seen testing 157.60, followed by 157.90 mainly due to the U.S. retail sales report, but gains are seen fading near 158.20 as downside euro risks remain.
Ashraf Laidi
Chief FX Strategist
CMC Markets US
a.laidi@cmcmarkets.com
