Bullish Developments From Gbpusd

The pound rallied strongly today on the back of large upside surprise in retail sales figures for March. Retail sales rose 1.5% last month vs. 0.4% expected due to a boost in weather-related spending on clothing, footwear and gardening tools. While the unseasonably warm March hasn't followed through to April, which has been fairly dismal across the country, this data comes at a pivotal time as next Wednesday GDP is released for the first quarter. So will the great British consumer save the day and help the economy avoid a recession? This is less clear-cut. While the pick-up in retail sales is encouraging, growth could be weighed down by a sharp drop in construction output. Added to that, the correlation between retail sales data and the measure of consumption in the national accounts ( ...

FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400) WORLD The yen weakened overnight despite a press report indicating that the Bank of Japan’s inflation forecasts may be raised. It seems some FX investors are already positioning themselves for USDJPY upside ahead of next week’s FOMC and BoJ meetings – both of which are likely to push the pair higher towards our 3m forecast of 85. Elsewhere, our bullish call on the Canadian dollar was supported by the more hawkish posture of the Bank of Canada, which warned that “in light of the reduced slack in the economy and firmer underlying inflation, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate”. This anticipated shift was the key driver of our USDCAD forecast revision last week (to 0.98 from 1.03 on a ...

Forex News and Events: The SNB's Quarterly Bulletin release didn't really provide any surprises. The key take-aways were that the SNB will stay true to its price stability mandate (while balancing policies with economic developments) through the enforcement of the “minimum exchange rate of EURCHF 1.2000” as “target range for the three month Libor will remain unchanged at 0.0–0.25%”. In addition, the bank will continue to “maintain liquidity on the money market at an exceptionally high level.” We would like to note, there is a slightly optimistic tone in the report. As risks have remained marginally unchanged, the bulletin notes improvements in the financial markets and mixed developments on the global growth front. While the SNB still views the overvalued CHF as a “challenge to the ...

Forex News and Events: In remarks prepared for a congressional hearing today, Fed Chairman Bernanke offered little new information of policy direction. He reiterated that the Fed's current path was correct and cautioned about reversing policies that the Fed believes are supporting the US economy. While these comments were nothing revealing, they do suggest that likelihood of QE3 has lessened (already priced in USD and yields) but further repeals of current strategy is dubious. It indicates that perhaps the market has gotten slightly ahead of itself in pulling in rate expectations. Hence today’s USD selling and US yields softening (capping USDJPY). Bernanke also mentioned the European crisis saying that certain critical developments had minimized the risk. He singled out bailout support ...

FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400) USD The Australian dollar managed to steady itself overnight after Tuesday’s scare about China’s appetite for iron ore, but the currency could not fully recover lost ground. Tuesday’s comments from an Australian miner appeared to provide anecdotal evidence of a Chinese slowdown and we can expect AUD to show extreme sensitivity to any further remarks of this nature. China is after all Australia’s largest export market, and iron ore Australia’s single-biggest export. Any doubts raised about both factors simultaneously risk triggering a double-dose of downside each time. Crucially though, we doubt any selloff will last long unless miners react by shelving mine development and expansion plans in anticipation of weaker commodity prices. This has not ...

FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400) WORLD Ranges were broadly flat overnight but the dollar has checked some of its advance amid fears that data is still not strong enough in theUSfor the Fed to continue allowing the market to price out expectations for monetary easing. On Friday theUniversityofMichiganconsumer sentiment index slipped to 74.3 in early March from 75.3 in February; industrial production was unchanged m/m in February; and the y/y reading for core consumer prices slowed to 2.2% in February from 2.3% in January. Yet, this should not mask the positive momentum in theUSeconomy, as theUniversityofMichiganreport included key improvements in labour market assessments, while manufacturing production was up 0.3% m/m in February. Moreover, at a 1.9% annual rate in the past ...

Forex News and Events: In the UK, Fitch revised the UK's ratings outlook to negative, putting them in line with Moody’s. The ratings agency reaffirmed that the government’s fiscal plan was creditable, but stated “The revision of the rating outlook to negative from stable reflects the very limited fiscal space to absorb further adverse economic shocks in light of such elevated debt levels and a potentially weaker than currently forecast economic recovery.” In the US, the domestic data continued to show signs of improvement. Empire State manufacturing index rose to a 21-month high of 20.2 in March (other components were slightly less optimistic) while initial jobless claims dropped back to 355k. Given the recent price action the FX markets are not focused on the US economic data as a ...

Forex News and Events: There weren't any real developments which supported risk accumulation however, markets were well bid all day. Global stock markets had rose particularly on the back of the US bank stress test which gave the US banking sector a boost, but the optimism spilt over other sectors rather than across the ocean. US treasuries continued their upward trajectory giving broad support to the USD. But the big story in FX remains the JPY. USDJPY climbed to 83.32 from 82.87 post meeting. The JPY was not helped by comments from Yasushi Kinoshita that ‘Japans fiscal situation is worse than Greece" which still linger in our minds. With both the BoJ and Fed delivering their expectations for policy path, it seems that interest rate divergence will support USD. The accompanying ...

FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400) WORLD The US yield curve was prodded into life by last night’s FOMC policy statement. US 2y yields climbed above 35 bp overnight and the 10y has finally hit 2.15%. This kept the yen in particular on the defensive, and the dollar also advanced more generally. USDJPY set an 11-month high trading between 82.68-83.32. Yesterday’s Fed and BoJ policy meetings suggest a gradual Fed-BoJ divergence should manifest itself over the months ahead and this should keep USDJPY risks skewed to the upside. Notably, the FOMC upgraded assessments of the US labour market plus capex, and no longer cited “slowing in global growth”. Perhaps more importantly, the FOMC now foresees “moderate economic growth” in the longer run, a step up from “modest” previously. Though ...