UK Retail Sales Miss but Cable Holds Firm

UK Retail Sales miss
EZ PMIs mixed
Nikkei 1.03% Dax -0.08%
Oil $51/bbl
Gold $123/oz.

Europe and Asia:
EUR EZ PMI 56.7 vs. 56.3
GBP UK Retail Sales -1.5% vs. -0.3%

North America:
CAD CPI 8:30

UK Retail Sales missed consensus estimates by a wide margin, but cable recovered from its initial knee-jerk loss to trade above the 1.2800 in mid-morning London dealing.

UK Retail Sales printed at -1.5% versus -0.3% eyed. On a year over year basis, Retail Sales rose only 2.1% versus 5.4% indicating that lower pound and higher inflation costs are taking a bite out of UK spending. The sales deflator jumped 3.3% versus 2.9% the period prior suggesting that higher import costs are making their way into price levels.

Normally, weakening consumer demand would be viewed as negative for the pound, prompting further easing from the BOE. However, given the fact that inflation pressures are increasing, the UK central bank may choose to remain relatively hawkish in order to contain inflationary pressures. Furthermore, in so far as most UK inflation is caused by weaker currency exchange rate rather than runaway demand, any strengthening of the pound should make the inflationary pressures dissipate in the foreseeable future.

Cable may also be the beneficiary of some safe harbor flows ahead of the French election on Sunday. As a result, the pair saw only modest selling post news and managed to rally above the 1.2800 level in mid-morning trade. Still, the massive move in the pair at the start of the week has yet to see further follow through and for now it faces stiff resistance at the 1.2850 level which it will need to overcome if the longs are to press towards the key 1.3000 target.

Meanwhile in Europe, the EZ Flash PMI data came in mixed with service slipping slightly, by manufacturing demand remaining solid. The pair, however, drifted lower as the morning wore on dropping below the 1.0700 figure as traders begin to position for the French election results on Sunday. The terrorist act in Paris yesterday that saw several people shot and curtailed campaigning of all candidates, may be weighing on the market that fears such incidents could help the candidacy of Marie Le Pen.

With no US data on the docket, the focus will be squarely on the EURUSD today and the pair could see a significant increase in volatility as the day proceeds.

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