Week In FX Europe – EUR/GBP Heatmap color changes: Blue to Red

The EUR/GBP cross trading volumes have surged after the surprisingly strong UK sales data print Friday morning. Immediately after the release volumes were up +211% versus the monthly average. All the action has been with the pound as the 18-member single currency continues to dither near its 2014 range lows. Sentiment for the EUR remains bearish and markets sellers have been cheered by the limited recovery from it lows outright (1.3545-50), even after last week’s relatively soft NFP print.

In contrast, the pound has managed to soar after a surprisingly strong UK retail sales headline print of +2.8% m/m (core) in December compared to expectations for a +0.3%. This massive gain, the largest in a decade, has more than managed to offset the downward revisions for November to +0.2% and +0.4% previously. Despite low inflation, the pressure on Governor Carney at the BoE for an early rate hike from the growth/capacity side continues to increase. UK CPI inflation fell to the BoE’s +2% target level last month for the first time in four-years. Chancellor Osborne has indicated that he wants to see above-inflation increase in the minimum wage before policy makers contemplate a change.

The strength in the UK sales data came from spending at smaller stores (+8.1%), department stores (+11%) and by purchases online (+21.6%). Numbers like these will have shifted the market bias towards a risk of earlier tightening ahead of the labor market data next week where the prospect is for the three-month average unemployment rate is to come down to +7.2% from +7.4% on Wednesday.

Speculators were long GBP going into the release (1.6330), but the bullish reaction after the headline remains impressive (1.6437), and technically implies that GBP is reverting to “outperformance.” Despite being long pounds, some profit taking has occurred. EUR/GBP repeated failures this week ahead of 0.8350 managed to pare a high percentage of speculative short positions. However, the renewed bullishness about the UK, coupled with rate divergence should have the pound outperforming its mainland competitor. The techies believe that a close below the 100-WMA 0.8303 implies much greater losses. The last similar break saw the EUR/GBP down -10%.

WEEK AHEAD

* CNY GDP
* NZD Consumer Prices Index
* EUR German ZEW Survey
* JPY Bank of Japan Monetary Policy Statement
* AUD Consumer Prices Index
* CAD Bank of Canada Rate Decision
* CAD Consumer Price Index

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell