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Canada's retail sales fell -0.2% mom to CAD 66.6B in November, worse than expectation of 0.0% mom. Sales declined in four of nine subsectors, led by contraction in food and beverage at -1.4% mom. Excluding autos, sales were down -0.5% mom, much worse than expectation of -0.1% mom.

Advance estimate suggests that sales rose 0.8% mom in December.

Full Canada retail sales release here.

• • Japan’s Core CPI eases to 2.3%

The Japanese yen has recovered after losing ground earlier in the day. USD/JPY rose as high as 148.80, its highest level in three weeks. The yen has rebounded and is trading in Europe at 148.10, down 0.03%. It has been a rough week for the yen which has fallen 2.1% and is moving closer to the key 150 level.

Japan’s Core CPI falls to 2.3%

Japan’s core inflation slowed for a second consecutive month, easing to 2.3% y/y in December. This matched the market estimate and was down from 2.5% in November. This was the lowest inflation rate since December 2022 and points to weaker inflationary pressure. Core inflation has been above the Bank of Japan’s target for 21 straight months, but the BoJ appears in no rush to tighten policy, arguing that inflation has been driven by cost-push factors and is not sustainable above the 2% level.

Still, the markets expect the BoJ will tighten policy, which would likely send the Japanese yen soaring. Every BoJ meeting has become a must-watch event in case there is a bombshell announcement. The BoJ meets next on Tuesday, with the BoJ likely to maintain current policy settings.

Atlanta Fed President Rafael Bostic has been making the rounds and preaching a message of caution with regard to rate policy. Bostic has said that he doesn’t expect a rate hike until the third-quarter and said caution was essential in order to avoid a scenario where the Fed lowered rates, inflation rose and the Fed had to again raise rates. Bostic’s comments were the latest example of the Fed pushing back against expectations of a rate cut in March. The markets have lowered the odds of a March cut to 54%, compared to 77% just a week ago, according to the CME’s FedWatch tool.

USD/JPY Technical

• USD/JPY pushed past resistance at 148.24 and 148.55 before retreating.
• There is support at 147.67 and 147.36

• Canada’s retail sales expected to fall to zero

The Canadian dollar is showing limited movement for a second straight day. In the European session, USD/CAD is trading at 1.3496, down 0.13%.

Markets brace for stagnant retail sales

Canada releases retail sales for November later today, and the markets are expecting no growth, following a 0.7% gain in October. Retailers tried to entice shoppers with discounts in November such as Black Friday, but unless there is a huge surprise from today’s retail sales, shoppers held the purse strings tight in November.

Canada’s economy contracted in the third quarter and a weak retail sales report will weigh on fourth-quarter GDP, which at best is expected to show minimal growth. The economy has cooled down due to the Bank of Canada’s aggressive tightening which has done a good job of curbing inflation, although December CPI surprised by rising to 3.4%, up from 3.1%.

The BOC has maintained the cash rate at 5.0% for three straight times and barring further acceleration in inflation, the rate-tightening cycle is over. The key question is the timing of a rate cut. The BoC would love to chop rates and kick-start the weak economy, but a rate cut appears unlikely unless inflation moves closer to the 2% target.

The Fed continues to push back against expectations of a March rate cut and the markets have had to sharply lower the odds of a quarter-point cut in March to 54%, down from 77% just one week ago. US economic data remains surprisingly strong, with the latest evidence coming from retail sales on Wednesday. The December report showed a gain of 0.6% m/m, following 0.3% in November and above the market estimate of 0.4%. This was the strongest gain in three months. A day before the retail sales report, Fed Governor Christopher Waller said the strong economy was giving the Fed “the flexibility to move carefully and methodically” on monetary policy.

USD/CAD Technical

• There is resistance at 1.3499 and 1.3554
• 1.3452 is under pressure. Below, there is support at 1.3397

• GBPJPY loses momentum after charting new high
• Downside moves likely; resistance within 188.00-189.00 area

GBPJPY ascended almost vertically after touching its 200-day simple moving average (SMA) at the start of January, erasing its latest bearish wave to print a new higher high of 188.90 on Friday—the highest level since August 2015.

The 188.00 round level remains a tough obstacle as the technical indicators detect some skepticism among investors. Specifically, the stochastic oscillator keeps fluctuating sideways within the overbought region and the RSI seems to be losing steam slightly below its 70 overbought level, suggesting room for improvement could be limited.

An extension above the 189.00 mark, where the upward-sloping line from the March 2023 low is placed, could clear the way towards the tough resistance line from May 2021 at 192.40. Additional gains from there could stabilize around the 2015 ceiling of 195.30-195.85.

Should the 188.00 barrier stand firm, the pair could initially seek support near the 186.00 constraining zone and then somewhere between its 50- and 20-day simple moving averages (SMAs) at 184.33 and 183.50, respectively. The 200-day SMA could be the next destination at 180.60, a break of which could immediately bring the 179.00-179.50 floor under examination.

In brief, GBPJPY is facing some difficulty in surpassing November’s wall around the 188.00 number, while the 189.00 mark could be another challenge as overbought signals are present.

• USDCAD extends its rebound to a fresh 1-month high
• But does not manage to close above the 50-day SMA
• Momentum indicators turn positive

USDCAD had been staging a solid recovery from its December low of 1.3176, but the 50-day simple moving average (SMA) prevented further gains. Despite the rejection, the 200-day SMA has been acting as a strong floor, thus the price is currently hovering between the converging SMAs.

Considering that the MACD has climbed to its positive zone for the first time since late November, the pair could jump above the 50-day SMA and revisit its one-month peak of 1.3540. Conquering that hurdle, the bulls could attack 1.3618, a region that held strong multiple times in December. Further advances may then cease at the April-May resistance of 1.3653.

Alternatively, should the price slide below its 200-day SMA, the September bottom of 1.3377 could be the first barricade for the price to claim. A violation of that territory could open the door for the April bottom of 1.3300. Failing to halt there, the pair could extend its retreat towards the December low of 1.3176..

In brief, USDCAD has been stuck between the converging 50- and 200-day SMAs, while the wide Bollinger bands might suggest heightened volatility moving forward. Therefore, a decisive break above or below the range defined by the SMAs could lead to a significant move in the same direction.

• UK retail sales slide 3.2% in December
• GBP/USD edges lower

The British pound has weakened slightly on Friday. In the European session, GBP/USD is trading at 1.2682, down 0.18%.

UK retail sales take a tumble

The markets were expecting a letdown from December retail sales after a strong November reading, but nobody was expecting a multi-year drop. Yet that’s what happened, as retail sales plunged 3.2% m/m, the lowest level since January 2021. Considering the sharp drop, the British pound’s reaction has been muted.

In November, retail sales jumped a revised 1.4%, as shoppers flocked to department stores to take advantage of Black Friday sales and other discounts. This meant that much of the Christmas shopping took place in November. The massive drop of 3.2% crushed the consensus estimate of -0.5%.

There is more to this story than Black Friday sales. The weak December reading reflected a UK consumer who is pessimistic about the economy and is being relentlessly squeezed by high inflation and elevated borrowing costs. December retail sales were brutal but the struggles faced by consumers are nothing new – retail sales fell by 2.8% in 2023, the lowest level since 2018.

The sharp drop in retail sales will have a negative impact on December GDP, which could mean that GDP for the fourth quarter is negative. If that is the case, the UK will technically be in a recession, with two consecutive quarters of negative growth. Even if the UK manages to avoid a recession, growth will be flat.

The Bank of England has kept rates unchanged for three straight times and meets on February 1. The sharp drop in retail sales supports the BoE considering a rate cut, but December inflation rose unexpectedly from 3.9% to 4.0%, and the BoE will be hesitant to chop rates before inflation is closer to the 2% target.

GBP/USD Technical

• GBP/USD is testing support at 1.2689. Next, there is support at 1.2625
• There is resistance at 1.2738 and 1.2802

UK Retail Sales fell sharply in December as consumers tightened their pursestrings during what is normally a hugely important time of year for retailers.

Any sense of optimism from the jump in sales in November was short-lived, with the decline in sales last month as widespread as it was steep. Everyone from food retailers to department stores saw a sharp reduction in sales as consumers spent less on gifts and, as it turns out, food during the festive season.

While real household incomes are rising once more, the last two years have clearly taken a significant toll and it would appear many are not yet feeling better off as a result of inflation falling below wage growth.

Some of that may be psychological after two years of seeing bills and prices rising so much compared with incomes but there will also be plenty whose incomes are still being squeezed or who have savings buffers that need rebuilding and debt repaying.

Then there's the evidence we're continuing to see in the aftermath of lockdowns that people are more inclined to spend on experiences than they are goods which has perhaps lasted longer than expected.

Either way, the question that Bank of England policymakers will be asking themselves is what this all means for the economy and the inflationary environment. While problematic for retailers, less demand could help the central bank in its mission to get inflation back to 2% and, as a result, cut interest rates sooner than it would currently admit.

Oil consolidating despite Middle East risks

Oil prices are steady today after another choppy but ultimately consolidatory week. While the price of crude remains sensitive to events in the Middle East, as we've seen over the last couple of weeks, the oil market remains well-balanced which is why we're not seeing prices higher. Supply disruptions remain an upside risk but there are downside risks too including the global economy and OPEC+ unity.

Gold holding above $2,000 for now

Gold is trading a little higher at the end of the week after rebounding off $2,000 a day earlier. The yellow metal has been driven lower by slightly softer expectations for rate cuts this year and a lack of data that could turn things back in its favour. The figures we've seen since the turn of the year have been fine but more than that is needed to maintain the enthusiasm markets ended 2023 with.

How big a post-ETF correction are we looking at?

Bitcoin is continuing to struggle in the aftermath of the spot ETF approvals. While we haven't seen a dramatic decline, the price is still more than 15% off its highs and it broke below $42,000 which appeared to be holding quite well over the last month. The key level now could be $40,000, a break of which would be a big psychological blow and perhaps indicate a more intense post-ETF correction is on the cards.

Daily Pivots: (S1) 187.63; (P) 187.94; (R1) 188.57; More...

Intraday bias in GBP/JPY stays on the upside for the moment. Sustained break of 188.63 will confirm larger up trend resumption. Next target is 38.2% projection of 155.33 to 188.63 from 178.32 at 191.04. On the downside, below 1187.01 minor support will turn intraday bias neutral and bring consolidations first. But outlook will stay bullish as long as 184.15 resistance turned support holds, in case of retreat.

In the bigger picture, up trend from 123.94 (2020 low) in in progress. Medium term outlook will stay bullish as long as 178.32 support holds. Next target is 195.86 long term resistance (2015 high).

Daily Pivots: (S1) 160.73; (P) 161.06; (R1) 161.47; More...

Intraday bias in EUR/JPY remains on the upside for the moment. Current rise from 153.15 is in progress for 161.8% projection of 153.15 to 158.55 from 155.06 at 163.79, which is close to 164.29 high. On the downside, below 160.03 minor support will turn intraday bias neutral first. But further rally is expected as long as 158.55 resistance turned support holds.

In the bigger picture, price actions from 164.29 medium term top are tentatively seen as a correction to rise from 139.05 for now. As long as 148.48 resistance turned support holds (2022 high), larger up trend from 114.42 (2020 low) could still resume through 164.29 at a later stage.

Daily Pivots: (S1) 0.8545; (P) 0.8570; (R1) 0.8584; More...

While EUR/GBP recovers ahead of 0.8548, further decline is still expected with 0.8619 resistance intact. Firm break of 0.8548 will argue that larger down trend is ready to resume through 0.8491 low. However, break of 0.8619 will dampen this view and turn bias back to the upside for stronger rebound.

In the bigger picture, fall from 0.8764 is seen as another leg in the whole down trend from 0.9267 (2022 high). Outlook will stay bearish as long as 0.8764 resistance holds. Break of 0.8491 will target 61.8% projection of 0.8977 to 0.8491 from 0.8764 at 0.8464.