The Queens Jubilee Saves Retail Sales

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On Thursday, EUR/GBP changed hands in the 0.7850 area at the start of trading in Europe. Sentiment on risk was still the key driver for trading on global markets and also in the currency market. So, most moves are mostly dollar driven. EUR/USD and cable spiked higher to new short-term highs early in European trade as investor sentiment was still ‘risk on’. However, this move hardly affected the EUR/GBP cross rate. The pair held in a very tight range within striking distance of the year lows. The UK retail sales came out on the weaker side of expectations. EUR/GBP gained a few ticks after the report, but the attempt higher had again no momentum at all. EUR/GBP returned lower in the intraday trading range. During the US trading hours, the euro came again under some pressure and in this process cable again clearly outperformed EUR/USD. EUR/GBP nosedived and dropped temporary below the 0.7800 mark.

In its annual report on the UK economy, the IMF painted a gloomy picture and indicated that the UK economy might need more fiscal and monetary stimulus.

However, this didn’t harm the performance of sterling. EUR/GBP closed the session at 0.7810, compared to 0.7846 closes on Wednesday evening. 

Today, the UK monthly budget data will be published. Of late, UK eco data (especially weaker than expected data) had seldom lasting effect on EUR/GBP trading.

UK retail sales values were up 1.4% on a like-for-like basis from June 2011, when they were down 0.6% on a year ago. On a total basis, sales were up 3.5%, against a 1.5% rise in June 2011. The Jubilee celebrations and warm weather saw a strong start to trading period. Food and drink, clothing and footwear and online all performed particularly well during the week preceding the Jubilee.

The remainder of the month proved much more challenging throughout the sector. Discretionary and big-ticket items continued to struggle as consumers “underlying caution about the economy, jobs and their personal finances curtailed spending.

So, we assume that EUR/GBP will continue to follow the global trend of the single currency. Given yesterday’s rather poor performance, we don’t row against the tide even as the EUR/GBP cross rate is heavily oversold. 

From a technical point of view, the EUR/GBP cross rate was captured in a consolidation pattern following a longstanding sell-off that started in February and ended Mid-May when the pair set a correction low at 0.7950. From there, a rebound/short squeeze kicked in. Continued trading above the 0.8100 area would call off the downside alert and improve the short-term picture. The pair tried several times to regain this area, but without sustainable results. Finally, EUR/GBP dropped below the 0.7950 range bottom. This break opens the way to the next high profile support, in the 0.77 area (Oct 2010 lows). The pair is oversold, suggesting that the decline might shift into a lower gear. However, for now there is absolutely no indication of a trend reversal. 

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About: FX Empire Analyst - Barry Norman

Barry produces a private Daily Market Review newsletter that is distributed around the globe to over 25,000 subscribers and recently published a book on Options Trading that is available from amazon.com

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