US retail sales data came in very poorly which weakened the dollar and gifted the euro some respite…

Publication date: 17 July 2012
Author: Richard Driver, CaxtonFX

US retail sales data came in very poorly on Monday, which weakened the dollar and gifted the euro some respite. There was more bad news from the IMF, which cut its outlook for global growth this year to 3.5% (to 3.6%) and growth in 2013 to 3.9% (down from 4.1%). This is unsurprising given the constant flow of negative economic headlines so far this year.

Today’s calendar is a full one with UK inflation, German economic sentiment data and comments from Mervyn King and Ben Bernanke all in focus.

STERLING/EURO: Sterling breached the €1.2750 level on Monday and continues to look well-supported ahead of today’s UK inflation update.

The IMF announced yesterday that it has cut its UK growth data forecasts to 0.2% for this year and 1.4% next year. Considering the IMF was predicting 2.3% growth in 2012 this time last year, the UK’s downturn has been particularly sharp. But still, the pound maintains plenty of safe-haven demand. Only a significant undershoot in this morning’s UK inflation figure looks capable of weighing significantly on sterling sell-off today.
This morning also brings an important German economic sentiment survey and a further decline is expected. This pair is trading above €1.27 and we can see further gains for the pound here this week.

STERLING/US DOLLAR: Sterling enjoyed further upside as US retail sales data reignite QE3 bets.

The core US retail sales figure equalled last month’s multi-month low of -0.4%, while the wider retail sales gauge hit a two-year low of -0.5%. Such poor figures automatically saw the market increase their bets that the Fed will be forced into boosting the US economy with QE3 sooner rather than later. There is plenty more US data released today, as well as a speech from Fed Chairman Ben Bernanke this evening, though the market may have its hopes too high for clues that QE3 is imminent.
Sterling is trading up at $1.5650 and we consider current levels to be decent ones at which to buy dollars, with further dollar gains around the corner.

EURO/US DOLLAR: The euro bounced by a cent off its lows despite confirmation that Germany’s top court will delay its decision until September.

Germany’s constitutional court announced yesterday that it will delay its decision on the legality of the ESM changes and the fiscal pact until September, which adds to the uncertainty that will characterise the coming weeks and months in the eurozone. Nonetheless, poor US retail sales data and a stronger day for global equities were enough to help this pair off its lows below $1.22.
The dollar’s weakness yesterday afternoon is all about positioning for some dovish comments from Bernanke this evening and we believe the market may be disappointed once again. This pair trades at $1.23.

STERLING/AUSTRALIAN DOLLAR: The aussie dollar recovered some early losses, helped by some less dovish than expected RBA minutes.

The RBA minutes revealed that the central bank saw ‘no need’ to cut interest rates at its meeting at the beginning of this month. So the next couple of months seem unlikely to bring a further rate cut, though negative eurozone developments can soon change the outlook. The door remains open to further monetary easing from the RBA this year, particularly amid growing focus on China’s economic slowdown.
This pair is trading at 1.52 this morning and sterling should benefit from some support at current levels.

STERLING/NEW ZEALAND DOLLAR: Sterling continues to creep higher against the kiwi dollar, helped by some weak quarterly inflation data from NZ.

New Zealand’s inflation data for the second quarter came in at 0.3%, well below expectations of 0.5% price growth. Clearly weak inflation data is a negative for the NZD but hopes for QE3 indications this evening from Ben Bernanke capped the kiwi’s losses.
Based on the expectation that Bernanke will keep his cards close to his chest this evening, sterling should be able to re-test recent levels above 1.96. For today though, we could see sterling remain under pressure.

STERLING/CANADIAN DOLLAR: This pair rallied by a cent as poor US retail sales reflected badly on the Canadian economy.

Yesterday’s exceptionally weak update from the US retail sector hurt the loonie yesterday. The Bank of Canada will give its monthly interest rate decision and statement this afternoon. It is hard to imagine that the BoC will be anything but dovish today and depending on how pessimistic the rhetoric is, we may see some further loonie weakness today.
Sterling is trading a cent higher up towards 1.59 this morning. Ben Bernanke will have a big say over this pair’s direction this evening, but sterling should remain well-supported in the meantime.