More correction possible as week draws to a close

Yesterday’s disappointing retail sales report from the US gave the market exactly what it needed overnight, an opportunity to take a breather, sit back and weigh up the situation.

The last week has been an unusual one for the markets, largely due to the commencement of the ECBs PSPP, which has weighed heavily on the euro and driven yields in the eurozone to record lows. The knock on effect of this throughout the rest of the markets, whether it be in the dollar, US Treasuries, commodities or equities has been greater than many expected, although it has made for an interesting week.

The combination of the PSPP and Fed rate hike expectations has weighed heavily on the EURUSD pair, driving it down to more than 12 year lows and prompting talk of parity which a couple of weeks ago many for forecasting for next year. The move has been extremely aggressive and arguably overdone and reports like the retail sales one we had yesterday tends to take the edge out of the move, prompting people to re-evaluate its value.

With today being another very quiet one, traders may look at this a think that more of a correction is warranted and that maybe people just got a little too excited. I don’t think yesterday’s move in the dollar or US equities in any way reflects people’s changing views on a mid-year rate hike as one piece of data in isolation would rarely do that, even if core sales have declined for three months. This has been a disappointing start to the year from a consumer spending perspective but many other economic indicators are very healthy. What’s more, with oil prices remaining low I think this puts the US consumer in an even better position as we head into the summer.

This could also be a very good summer for the eurozone. The currency has weakened so significantly that more people will now be looking at places like Greece and Spain for holiday’s and short breaks. The currency moves really have made these places more attractive. Especially when combined with the efforts made in recent years to make the economy’s more competitive leading to lower prices. This could offer some support for the euro over the next six months and delay the move to parity against the dollar until later this year.

As already mentioned, it is looking like a fairly quiet day from a news and data perspective. The first half of the European session offers extremely little, while the early afternoon brings PPI inflation data and the preliminary UoM consumer sentiment figure. The PPI reading can be a good indicator of future inflation so is worth tracking, while the UoM reading could give some insight into consumer spending expectations ahead of the summer.

The FTSE is expected to open 8 points higher, the CAC 16 points higher and the DAX 50 points higher.

For a look at all of today’s economic events, check out our economic calendar.

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