Pound Losses Continue As Retail Sales Fall For Second Month

Talking Points

• Japanese Yen: Finds Support at 95.00
• Pound: Retail Sales Fall For Second Month
• Euro: Consolidating Above 1.2500
• US Dollar: Jobless Claims Philly Fed on Tap

Pound Losses Continue As Retail Sales Fall For Second Month

The Pound continued to fall leading up to the U.K. retail sales report, before it pared some of its losses when the reading was better than expected. However, the bullish momentum was short lived as the Sterling ran into resistance at the 1.4900 price level. After reaching as high as 1.5250 yesterday the Pound would fall nearly 400 bps on the back of risk aversion flows and declining interest rate expectations. U.K. retail sales fell 0.1% in October which was better than the -0.9% that economists had predicted. Nevertheless, consumer consumption dropped for a second month and expectations are that shoppers will continue to curb spending as the labor market weakens and the housing slump continues.

Britons increased their spending on food by 1.0% which helped offset pullbacks in purchases of textiles and household goods which declined 1.5% and 3.4% respectively. On an annualized basis sales of apparel actually rose 1.3%, but the 5.4% drop in household goods for the same period demonstrates that shoppers are prioritizing their purchases. The BoE's minutes yesterday assured that the central bank will continue to cut rates further, which was reinforced by Deputy Governor John Gieve, who stated that central banks and governments must be ready to take actions and that the advanced economies are 'only in the early stages of a recession'. The markets are still pricing in another 137 bps of rate cuts from the central bank over the next twelve months which will remain a weighing factor on the currency.

The Euro has settled into a tight range after yesterday's risk driven sell off that sunk the single currency to as low as 1.2473. Price action has seen the EUR/USD pair trade between 1.2475 -1.2545 throughout the overnight session. Despite, the volatility that was seen yesterday the Euro continues to trade within its broader range of 1.2400-1.3000 where it has remained for entire month. If risk aversion continues to grow today we may see a break of support which could send the pair to further losses with 1.2000 as the next major support level. Interest rate expectations took another hit today as German factory gate prices unexpectedly fell 0.7% which is the most since 2001. Declining inflation will allow the ECB to be aggressive in their easing policy as they try and stem the downside risk to growth.

The U.S. economic calendar is dotted with second tier indicators that will give further evidence of the severity of the current downturn but may have little impact on price action. The dollar briefly traded on fundamentals yesterday when it was sunk by a 1.0% drop in inflation, but the sell off in the equity markets reversed losses as risk aversion flows sent the dollar soaring again. Concerns that the U.S. government may have to let one of the big three U.S. automakers fail as there may be limitations on the aid they can provide pushed stocks toward the lowest levels in 5 ½ years. The potential impact that this may have on an already fragile U.S. economy and a struggling global economy has sparked risk aversion which has carried over through Asian and European session and is expected to weigh on U.S. markets today. Therefore, despite the weak fundamental data expected to cross the wires safe-haven flows should lead to further dollar gains today. Indeed, fundamental data today may only encourage equity traders to stay on the sideline as jobless claims are expected to remain above 500,000 for a second week, while manufacturing in the Philadelphia area is forecasted to remain near its lowest level since 1990. Meanwhile, the leading indicators gauge which gives an outlook for the next six months is anticipated to slip 0.6%.

DailyFX

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